Selling a rental property? Here are the tax consequences

FILE - A sign is posted in this January 27, 2021 file photo in Sacramento, California

Selling a rental property is more complicated than selling your own home. If you don’t use the proceeds to buy another property, it will cost you. (Ricco Pedroncelli / Associated Press)

Dear Lise: My brothers and I are thinking of selling a triplex. It was bequeathed to us by our mother when she passed away in 2007. There is no mortgage and it is fully occupied. If we sell, my wife and I (both over 50) would get about $200,000 and would like to minimize the tax impact. We own our house free and clear and we have no debt. We would like to use this windfall to help our son buy a house. We would also give our daughter a cash gift. We have no interest in purchasing another investment property using a 1031 exchange. Any suggestions for minimizing our tax burden given our circumstances?

Answer: Talk to a tax professional, because selling a rental property is more complicated than selling your own home.

You are ineligible for the profit exclusion from home sales of $250,000 per person, and in addition to paying capital gains tax, you also face a 25% depreciation recovery tax. (Depreciation is the amount of wear and tear you wrote off during your ownership of the property; the IRS requires you to pay back that tax deduction when you sell.)

A large capital gain could affect other areas of your finances, such as your Medicare premiums, and your professional can help you plan for that, too.

A 1031 exchange would allow you to defer taxes on a rental property by purchasing a similar replacement property.

Another solution would be to keep the property, continue to enjoy the rental income, and bequeath your share to your children when you die. Your side will receive a favorable increase in the tax base so your heirs do not owe taxes on capital gains made during your ownership. They also won’t face the depreciation recovery tax that you otherwise would have to.

But of course it’s not a good solution if you don’t want to be a landlord anymore or you want the money instead. If so, the tax professional can help you properly factor in sales costs, attorney fees, and improvement fees that could lessen your tax hit, and may be able to suggest other ways to handle your tax bill.

Opening an IRA for a retired spouse

Dear Lise: Are spousal IRAs a good idea for a couple when one spouse is retired but the other is working? I am 63 years old and work full time. My husband is 76 and retired. I have a Roth IRA; He does not. I contribute the maximum amount to my IRA. If we create a spousal IRA for him, would we be able to contribute as if it were a regular Roth IRA?

Answer: YES. Normally people must have earned income — such as wages, salary, commissions, tips, or self-employment income — to contribute to an IRA or Roth IRA. But if you’re married and working, you can contribute up to the maximum amount on behalf of a non-working spouse. In 2023, the maximum contribution for people age 50 and older is $7,500. As long as you make at least $15,000 ($7,500 for two), you can max out both accounts.

By the way, there is no special “spousal IRA” account. Just open a regular IRA or Roth IRA in your name.

Prospects and cons of HELOC

Dear Lise: We have a home equity line of credit through our credit union. I paid for it very aggressively and it will pay off in two months. This is our only debt. I was thinking of leaving a small balance ($100). It would cost $7.50 a year to have the loan available, but we would have instant access to $200,000 with no paperwork, etc. Your thoughts?

Answer: Contact your credit union and ask if a balance is required to keep the line of credit open, as this is typically not the case.

You should know, however, that HELOCs typically have two phases: a five- to 10-year “draw” period, during which you can borrow and pay back the line just like you would a credit card, followed by a of repayment from 10 to 20 years during which you pay what is still owed. Normally it is not possible to withdraw additional money during the repayment period.

If your HELOC is nearing the repayment stage, you can replace it with a new HELOC that you leave open and unused for emergencies. Closing costs often range from 2% to 5% of the loan amount, although some lenders discount those fees.

Liz Weston, Certified Financial Planner, is a personal finance columnist for Nerdy wallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at

This story originally appeared in the Los Angeles Times.

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