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Dealing with the IRS with home sale can be tricky

By ERIC P. FEICHTHALER - Real Estate Law | Jan 5, 2023

Eric P. Feichthaler

Dear Mr. Feichthaler:

One of my resolutions for the new year is to renovate our rental house and sell for a nice profit. What kind of items can be added so we don’t pay as much income tax when we sell?

— Jill S.

Dear Jill:

Generally, the IRS would like to tax you on the profit, or the difference between your purchase price and the sales price of your property. The purchase price is the “initial basis,” or the consideration paid for the property. Typically, “big ticket items” like a new roof, replacement of heating and cooling systems, major electrical or plumbing work or additions to the home would all be added to the official amount you paid. As this is a rental property, minor items or maintenance items would typically be expensed each year and deducted from rental income. If expenses are deducted, then those same expenses cannot be added to basis.

Another type of expense you likely had, and will have, are expenses related to the purchase and sale itself, like title insurance, transfer tax and commissions on sale. All of these can be added to basis on purchase, and deducted from the amount of the sales price for tax purposes.

Most of my clients depreciate the building itself on their taxes, saving money annually on income taxes. If you have depreciated the rental house, all amounts depreciated will be deducted from the basis, resulting in a larger income tax burden on sale. One little twist the IRS has given to rental property owners is that, if you do not claim depreciation, the IRS PRETENDS you did anyway! This results in a lower cost basis and higher taxes, and a missed opportunity for lower income taxes in prior years. If you have been avoiding taking depreciation in hopes of paying lower income taxes, don’t! If this did occur, you can amend tax returns going back three years to claim the depreciation.

Everyone knows the dealing with the IRS can be tricky, and often unpleasant. We recommend consulting with a certified public accountant or attorney to ensure your returns are correct and claiming the full amount of deductions deserved. In the long run, this saves you money, and can help keep auditors away.

Eric P. Feichthaler has lived in Cape Coral for over 35 years and graduated from Mariner High School in Cape Coral. After completing law school at Georgetown University in Washington, D.C., he returned to Southwest Florida to practice law and raise a family. He served as mayor of Cape Coral from 2005-2008, and continues his service to the community through the Cape Coral Caring Center, Cape Coral Museum of History, and Cape Coral Kiwanis. He has been married to his wife, Mary, for over 20 years, and they have four children together. He earned his board certification in Real Estate Law from the Florida Bar. He is AV Preeminent rated by Martindale-Hubbell for professional ethics and legal ability, and is a Supreme Court Certified Circuit Civil Mediator. He can be reached at eric@capecoralattorney.com, or 239-542-4733.

This article is general in nature and not intended as legal advice to anyone. Individuals should seek legal counsel before acting on any matter of legal rights and obligations.