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Investing in real estate rental properties can produce returns just like stocks, bonds and other investments. While the method of investing may change, the one thing that never changes is the tax liabilities that come with the sale of an asset. The IRS mandates that capital gains be levied when an asset sale is reported. Rental property owners that have created corporations must be aware of the tax liabilities that come with selling rental properties.
The sale of every property is unique and your tax calculations are best completed by a CPA or tax professional. A costly mistake in reporting a gain on the sale of your asset may result in penalties from unreported income. The IRS specifies different handling for the sale of personal property compared to rental property. Knowing whether you have a personal gain or loss will determine if your corporation must pay capital gains tax during your tax filing period.
IRS Capital Gains Tax Rules
When Rental Properties are Considered a 1231 Transaction
• Property is Held for More Than One Year
• Property is Used in Trade or Business
• Gains are Recognized During Ownership
• Depreciation Has Been Reported
It is likely that your rental property will be considered a 1231 transaction that will define it as a capital gain or loss when reporting the sale during a taxable year.
How to Calculate Your Capital Gains or Losses
This illustration should be used as a guide and is not a substitute for tax advice
Example of the sale of a corporate owned rental property held for one year:
Selling Price: $100,000
Selling Expenses: $2500
(Selling Price – Expenses = Net Amount of Sale)
Net Amount of Sale: $97,500
Purchase Price: $89,500
Annual Depreciation: $5000
(Purchase Price – Depreciation = Adjusted Basis)
Adjusted Basis: $84,500
(Net Amount of Sale – Adjusted Basis = Net Gain or Loss)
Net Gain: $13,000
Capital Gains Tax Rates for 2012
If you have realized a net gain, the amount of capital gains tax that you pay will depend on your annual income. The current capital gains tax for earners or entities in the 10 percent to 15 percent tax rate is currently set at zero percent. Your corporation could offset losses against your earned income to qualify for inclusion in a lower tax bracket. If you are in the 25 percent to 35 percent tax bracket, the capital gains tax is 15 percent.
The 2012 rates will expire in 2013 and are set to rise unless legislation is modified. One of the disadvantages of owning investment property as a corporation is paying state and federal taxes that are not applicable to individual taxpayers or low income earners that file annual tax returns.