When selling a rental property, is the full sale price considered income or only the capital gains?

by Mark B. Zinman, CPA | Sep 06, 2019

When selling a rental property, is the full sale price considered income or is only the capital gain considered income on my taxes? The difference will bump me into a higher tax bracket and will determine how much I am willing to accept as an offer. Additionally, are there other taxes on the sale of a rental property in Pennsylvania if I am a resident of another state?

A rental property sale will go on IRS Form 4797 (Sales of Business Property). You will list the gross sales price and subtract the basis you have in the property as well as any selling costs. The net gain is what is reported on your income tax return, and that will be added to your marginal income. Capital gains still have preferred status on rates (lower than ordinary income), and the tax on that will be calculated separately from your other income.
Regarding your indication that you will be “bumped into a higher bracket,” income tax rates are marginal, meaning that you pay the highest tax on the last dollar earned. So, if you have additional income and your marginal tax bracket changes, it only affects that additional income. So, if you are in a 20% marginal bracket and then go into a 25% marginal tax bracket, only the additional income is subject to the 25%. It is not calculated on the entire income.

As far as state tax is concerned, if the property is in Pennsylvania, you will have to file a Pennsylvania income tax return and pay tax on the gain to Pennsylvania. You will then have to report the same gain to your resident state and calculate the gain on that income at your resident state rate. Then you will be given a credit against your resident state tax up to the amount that you paid in Pennsylvania. So, the net result is that you will end up paying the higher rate between Pennsylvania and your resident state. Since Pennsylvania is a flat tax state at 3.07%, it is likely that your state tax will be calculated at your resident state rate minus the 3.07%.

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Answered by: Mark B. Zinman, CPA, is a managing partner with Zinman & Company in Southampton, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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