So you’ve finally decided to sell your rental property, perhaps because you are relocating to another city, or perhaps because you are simply not inclined to managing the property anymore. In any rental property sale, keep in mind that you will have to deal with taxes and potential liabilities.
A rental property is taxed more than a personal use property. When it’s sold for a price that’s more than its purchase cost, it will be levied a profit or capital gains tax. The determination of the tax amount can be a little complicated, but you can assume that it’s considerably higher than normal. This is especially true if you’ve declared depreciations on the property while you still own it.
Capital gains tax, however, can be avoided through rollovers. If you are planning to use the profits from the sale of rental property to purchase a similar property, the capital gains tax may be deferred, until the next transaction that will yield a new capital gains tax.
When it comes to liabilities you might face during the sale, you can consider incorporating your business. Incorporation can protect you against personal liabilities and taxation. There are other options you can consider in handling capital gains tax. To make the most profitable or less costly decision, it is best to seek the help of commercial real estate sales professionals who can guide you through the process.