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I own residential rental property and a commercial building. I am considering selling the rental property and investing the profits to pay down the loan on the commercial property. What are the tax implications of doing this? Thanks in advance.

Capital Gains
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Robert Ferguson
The first question needing answered is the the total real cost of the rental property and the amount that has been depreciated on those costs. The total acquisition costs include not only the purchase price but all other cost paid such as title insurance, escrow fees, etc. Usually a review of the HUD 1 (Real Estate Purchase Settlement Statement) will give you those costs. If you paid any other costs, such as a property inspection report, those costs would not be on the HUD 1.

Once the real cost of acquisition is known, then the depreciation claimed prior to the date of the sale would would be deducted. This would establish the value you have in the building at the time of sale.

Once sold, the you would deduct all costs from the sales price, again using the HUD 1 and any other cost you may have paid outside the Escrow. Then deduct your established value from that amount. This then establishes the real amount of increase. Capital gains tax would apply to this amount.

It is a bit of a chore to arrive at, but certainly worth the effort to reduce the amount of tax that would be owed by all of the deductions for costs of both the purchase and sale.

Once you have those numbers, any competent tax form preparer should be able to fill out the proper IRS forms to be added to your tax filing.

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