Google Answers Logo
View Question
Q: How is profit from sale of rental condo taxed? ( Answered 5 out of 5 stars,   3 Comments )
Subject: How is profit from sale of rental condo taxed?
Category: Business and Money > Accounting
Asked by: hyphenga-ga
List Price: $10.40
Posted: 04 Nov 2006 10:07 PST
Expires: 04 Dec 2006 10:07 PST
Question ID: 780068
Yes, I know I should ask a professional tax advisor, but GA
researchers are often just as knowledgeable and a lot more fun. :-)

Here are condo specifics:
Purchased in 1996 for 75K (in California). Currently no mortgage. I
never lived in it; purchased as investment only - been renting it out
and declaring rental income on Schedule E (which I believe is taxed as
ordinary income). Let's say I sell today for 425K. Is the profit taxed
as ordinary income? Or taxed at capital gains tax rate (which I
believe is currently not too painful at 15%)?

I am not looking to avoid or defer tax - no Starker/1031 exchange in
this scenario. I will have to fork over lotsa dough to the IRS - just
wondering what the tax rate will be. I think it's "capital gains" tax
rate because this is (and always was) an investment. Thoughts?

Bonus question for $4 tip (and I never welsh). Out of curiosity, if I
sell my personal residence - and I qualify for the 250K tax exclusion
on the profit BUT the profit exceeds 250K (let's say it's 350K) - how
am I taxed on the extra 100K? Ordinary income? Or 15% capital gains
tax rate? This is my own home - it was never meant as a business
investment. Thanks very much!
Subject: Re: How is profit from sale of rental condo taxed?
Answered By: sublime1-ga on 04 Nov 2006 14:06 PST
Rated:5 out of 5 stars

Cute name...  ; )

Whether the real estate is your own home or a rental unit, it
is still an investment, or, in tax terms, a capital asset,
regardless of whether it is a business investment. If held for
a period of more than one year, it becomes eligible for taxation
as a capital gain, under the lower tax rates which apply.

By way of contrast, if you hold a capital asset, such as a stock
or a piece of real estate, for 11 months and 15 days, it would
be taxed at the rate of your regular income tax bracket, which
can be seen on this page from, so you could end
up paying as high as 35% in taxes:

There's a very useful article on The Motley Fool financial site
by the site's tax advisor, Roy Lewis, titled, 'Making Home Sale
Capital Gains Disappear', which discusses the ins and outs of
the capital gains tax for real estate:

"The law says that the property must be used as a principal
 residence for at least two years during the five-year period
 ending on the date of the sale of the residence."

That can mean any two continuous years in the five-year period
prior to the sale of the residence. Given those conditions, an
owner can deduct 250K (or 500K, if married filing jointly) from
the sale price of the property, and pay capital gains tax on the

Additionally, if the sale of the property can be shown to be as
a result of certain 'unforeseen circumstances', such as:

- death,
- divorce or legal separation,
- becoming eligible for unemployment compensation,
- a change in employment that leaves the taxpayer unable to pay
  the mortgage or reasonable basic living expenses,
- multiple births resulting from the same pregnancy,
- damage to the residence resulting from a natural or man-made
  disaster, or an act of war or terrorism, and
- condemnation, seizure or other involuntary conversion of the

...then the owner can claim a partial exclusion as follows,
according to the IRS Home Sale Exclusion Rules:

"...the maximum exclusion amount of $250,000 ($500,000 for a
 married couple filing jointly) is limited to the percentage
 of the two years that the person fulfilled the requirements.
 Thus, a qualifying seller who owns and occupies a home for
 one year (half of two years) ? and who has not excluded gain
 on another home in that time ? may exclude half the regular
 maximum amount, or up to $125,000 of gain ($250,000 for most
 joint returns). The proportion may be figured in days or months.",,id=105042,00.html

So why am I focusing so much attention on the 2-year residence
issue when you're asking about a rental condo? Because, going
back to Roy Lewis' article, you might want to consider the
benefits of moving into the condo and living there for the two
year requirement in order to give yourself the 250K or 500K
exclusion when you finally sell it. Also, the 2 years need
not be continuous. This is illustrated in this section of
IRS Publication 523, 'Selling Your Home':

Short of that scenario, you are selling a rental property,
and are entitled to no capital gains exclusions, however
it is still taxed under capital gains. Publication 523 
covers all you need to know to figure your gains:

Basically, it comes down to how much you sold it for minus
how much you paid, but you can add to how much you paid the
cost of:

"Additions and other improvements that have a useful life of
 more than 1 year".

You can also subtract from the sale price any selling expenses:

- Commissions,
- Advertising fees,
- Legal fees, and
- Loan charges paid by the seller, such as loan placement fees
  or "points.'

Also note that you generally cannot exclude the part of the
gain equal to the depreciation you claimed or could have 
claimed for renting the house.

See the Table of Contents for Pub 523 for more:

Also see Publication 527, 'Residential Rental Property':

Okay, so now, to capital gains, from Publication 544,
'Sales and Other Dispositions of Assets':

"If you hold a capital asset longer than 1 year, the gain or
 loss from its disposition is long term. Report it in Part II
 of Schedule D (Form 1040)."

"If the total of your capital gains is more than the total of
 your capital losses, the difference is taxable. However, the
 part that is not more than your net capital gain may be taxed
 at a rate that is lower than the rate of tax on your ordinary

"The tax rates that apply to a net capital gain are generally
 lower than the tax rates that apply to other income. These
 lower rates are called the maximum capital gains rates.

 The term 'net capital gain' means the amount by which your
 net long-term capital gain for the year is more than your
 net short-term capital loss.

 See the Schedule D (Form 1040) Instructions."

Rather than digging into the instructions for form 1040, 
let's go back to our tax expert, Roy Lewis, for the rates:

"Under the prior law, long-term capital gains (gains on
 those assets held for more than one year) were taxed at
 a maximum rate of either 20% or 10%, depending on your
 income. Additionally, there was also a provision in the
 old law that allowed for a reduced long-term gain rate
 of 18% or 8% if your gain was attributable to what was
 called 'superlong-term gains.'

 But that's all changed now. The 2003 Tax Act reduces the
 old 20% rate to 15% and the old 10% rate to 5%."


"Also, under the old law, there were two other special
 capital gains rates. One was a 25% rate imposed on
 depreciation taken on the sale of real property. The
 other was a 28% gain on the sale of collectibles (such
 as guns and coins). The new 2003 Tax Act did not change
 those rates on those specialty gains."


"Here's some good news: For those of you looking down the
 horizon, the new 5% capital gains rate will be reduced to
 0% (that's right -- nada, nothing, zilch!) in 2008.

 But don't get too excited. All these new tax provisions
 sunset after 2008. Unless these changes are made permanent
 before then, the tax law will revert back to the way it
 was before the passage of the 2003 Tax Act. We still have
 a few years before the sunset provisions kick in, but
 remember that those provisions are out there."

So, best case scenario: Sell the home you're currently 
living in and deduct 250K/500K from the capital gains.
Move into your condo for 2 years and then deduct another
250K/500K from the sale of that unit.

Just a thought...  ; )


Additional information may be found from further exploration
of the links provided above, as well as those resulting from
the Google searches outlined below.

Searches done, via Google:

capital gains tax
hyphenga-ga rated this answer:5 out of 5 stars and gave an additional tip of: $4.00
Excellent - lots of good info and links to explore. Thank very much!

Subject: Re: How is profit from sale of rental condo taxed?
From: abezon-ga on 04 Nov 2006 15:06 PST
Actually, a rental condo is not a capital asset; it is a depreciable
asset. See section 1221 of the tax code.

The difference between net sales price after expenses & what you
originally paid + costs of purchase is capital gain. It is taxed at a
max rate of 15%. Your total gain is the difference between net sales
price and adjusted basis after depreciation. The recapture of
depreciation allowed or allowable is ordinary income, but taxed at a
max rate of 25%.

Example: You bought for $75k, rented for 10 years & could have claimed
$25,000 depreciation during that time. Your adjusted basis is $50,000.
You sell for $425k; $400k after commission & expenses. Your net income
is $350,000, consisting of long term capital gains of $325,000 and
"section 1250 unrecaptured gains" (depreciation) of $25,000. Assuming
your other income puts you into the 25% tax bracket, your tax would be
325,000 x .15 + 25,000 x .25 = $55,000. Son't forget to add California
taxes too!

If you move into the condo for 2 years (either selling your current
home or renting *it* out for 2 years), you could exclude $250,000 of
capital gains/$500,000 if you're married filing jointly. Your adjusted
basis is still $50,000, and your income from sale would be $350,000.
Taxable income would consist of about $22,000 section 1250 gains (only
have to recapture the depreciation allowed or allowable since May
1997) + 78,000 capital gains/$0 capital gains if MFJ. Federal tax
would be about $17,200 if you're single/$6250 if MFJ. Note, the actual
profit will likely be higher since the condo will continue to
appreciate over the next 2 years before you sell it.

You'll have to decide whether the savings is worth the annoyance of
the move. Be sure to document the move by changing the address on your
license, voter registration, car registration, etc. The 2 year period
starts the day you move into the condo. If Uncle Sam paid you & your
spouse $2,000/month to live in that condo, would you do it?

If you have not claimed depreciation since you bought the place, see a
tax pro about claiming 'catch up' depreciation before selling.

See a tax pro in your area to handle the actual sale. An Enrolled
Agent at H&R Block should be able to handle the tax prep easily.

abezon, Enrolled Agent 
Feel free to tip your local ASPCA .....
Subject: Re: How is profit from sale of rental condo taxed?
From: sublime1-ga on 05 Nov 2006 18:26 PST

Thanks very much for the 5-stars and the tip!

And thanks to abezon-ga for expanding on the topic so knowledgeably!

Subject: Re: How is profit from sale of rental condo taxed?
From: keystroke-ga on 01 Dec 2006 22:23 PST

You always have had such intelligent things to say on GA.

You should make your way over to the GA Alumni group:
(And you as well, hyphenga)


Important Disclaimer: Answers and comments provided on Google Answers are general information, and are not intended to substitute for informed professional medical, psychiatric, psychological, tax, legal, investment, accounting, or other professional advice. Google does not endorse, and expressly disclaims liability for any product, manufacturer, distributor, service or service provider mentioned or any opinion expressed in answers or comments. Please read carefully the Google Answers Terms of Service.

If you feel that you have found inappropriate content, please let us know by emailing us at with the question ID listed above. Thank you.
Search Google Answers for
Google Answers  

Google Home - Answers FAQ - Terms of Service - Privacy Policy