Before You Sell a Rental Property: Five Questions to Review With Your CPA
Before you set a closing date, ask your CPA for two numbers: your estimated taxable gain and the cash you expect to keep after selling costs, loan payoff, and taxes. Then use those numbers to compare selling now, holding, or pursuing an exchange if you still want to own investment real estate.
1. Tax: How much gain could I report?
Start with the purchase closing statement, records of major improvements, and the depreciation schedule. Improvements may increase your tax basis, while depreciation generally reduces it, including depreciation you were entitled to take. Ask how depreciation affects the character of your gain and whether unused rental losses could be deducted. A fully taxable sale of your entire interest in the activity to an unrelated buyer generally allows suspended passive losses, subject to the applicable rules. IRS Publication 544 · IRS Publication 925
2. Cash flow: How much would I actually keep?
Ask your agent or escrow officer for an estimated closing statement. Compare cash after selling costs, loan payoff, and estimated federal and state taxes with what the property could earn if you kept it. Include likely repairs, vacancies, and the return you could earn on the cash after a sale.
3. Debt: What will the lender take at closing?
Get a written payoff quote. Ask whether it includes a prepayment charge and whether any other debt is secured by the property. In a typical cash sale, paying off your own mortgage reduces the cash you take home. The payoff is separate from the calculation of taxable gain.
4. Ownership: Who owns the property and who reports the sale?
Bring the deed and any LLC, trust, or partnership documents. Ask how ownership affects who signs, who receives the proceeds, and who reports the gain. Tell your CPA if you inherited the property, received it as a gift, or lived in it before renting it. These facts can change the analysis. IRS Publication 551 · IRS Publication 523
5. Timing: Which choices need to be made before closing?
Ask how closing this year versus next year could affect estimated taxes and cash needs. If you want to stay invested in real estate, discuss a Section 1031 exchange before closing. A qualifying exchange can defer gain, and taking actual or constructive receipt of the sale proceeds can prevent deferral. Talk with your CPA and a qualified intermediary early enough to coordinate the transaction. IRS guidance on exchanges
A simple example
Suppose a rental sells for $800,000 with $40,000 in selling costs and a $500,000 adjusted tax basis. In this simplified example, the gain is $260,000 before any exclusions or deferral. If the seller also pays off a $350,000 mortgage at closing, the cash left before taxes is $410,000. The gain and the cash answer different questions. Ask for both before committing to your next purchase.
Bring the purchase statement, improvement records, depreciation schedule, prior passive loss carryovers, loan payoff quote, and estimated closing statement to your review. If you’re weighing a sale, start with JH Group CPA’s Real Estate Strategy Review.
This example is for general education. The tax result depends on your facts.