Sold a rental property and I am a sole proprietor

Question

I made about $20k this year with my business before deductions and expenses subtracted  ($15k estimated profit) I had to sell my rental property due to divorce in order to pay him his share of the equity in the marital home which my children and I live in currently. The 3.3% was already taken for capital gains for the state of CA out of the proceeds by escrow/title. What if any liability do I have for Federal capitol gains taxes and how and where do I report it exactly on my return.

KristineS · Answer

Hi lallen,

Determining how much capital gains tax you may need to pay on the sale of the rental involves a few different factors. FreeTaxUSA will guide you through the process.

Your rental information and sale will be listed under Income > Business Income > Rental Income (Schedule E). Our software will automatically create all the forms needed for the sale of the rental based on your input.

If you have used FreeTaxUSA previously to include your rental, the prior years' information carries forward year in year out. If you have not, you will need to manually enter some information into our software on your rental house. This can be found on your last filed tax return deprecation worksheets.

You will enter whatever rental income and expenses you would normally claim based on rental activity during the year of sale, and you will also enter the sale of the rental itself. This includes information such as when the house was placed in service as a rental, original cost and sales price. You will almost certainly have depreciation recapture for the sale of your rental if you have been renting it out over time, and will pay ordinary tax on that amount and capital gains tax, if any. The 2023 FreeTaxUSA software is available for you to input information on the sale of your rental and get a general idea of what this might look like for you next year.

[Deleted User] · Answer

Hello!

You can enter information for the sale of the rental in the Schedule E section of the software.

Menu Path: Income > Business Income > Rental Income (Schedule E)

After beginning the Schedule E, answer Yes to the question on the Rental Income Information screen that asks if you disposed of your entire interest in the property. This screen has the title "Tell us about your rental property."

In addition, enter your rental home property information on the Depreciable Asset Information screen in the Rental Income section of the software. You will be able to indicate it was sold and enter information regarding the sale of the property there.

Selling a rental property is considered a capital gain or loss. The tax rate for capital gains in many situations is about 15%, but the depreciation recapture portion of the sale of the rental is taxed at a maximum rate of 25%.

You can read more about capital gain tax rates with this website link:

https://www.irs.gov/taxtopics/tc409