20 Jun How much is owed in tax when I sell this rental property?

Q. I am in the process of selling a rental property in New Jersey but I’m unsure of what my tax liability will be. Twenty years ago, my mother deeded the house to me for $400 and I am selling the house for $400,000. I have paid New Jersey and federal taxes on the annual rental income.
— Seller

A. Good luck with the sale of the property.

Taxes will be due based on your taxable gain.

To determine the taxable gain, you deduct your cost basis, fixing up expenses and other closing costs from the $400,000 sales price, said Gerard Papetti, a certified financial planner and certified public accountant with U.S. Financial Services in Fairfield.

Based on the facts provided, the difference between the fair market value and the $400 you paid to your mother would be considered a gift, so you receive her carryover cost basis — what she paid for the residence plus improvements — plus the $400 you paid to her to arrive at your cost basis, Papetti said.

“If your mother rented the house while she owned it her cost basis would have been reduced by depreciation allowed or allowable,” he said. “If you were the first to rent the house 20 years ago, the carryover cost basis would have been reduced each year by the depreciation allowed whether or not you actually deducted it against the rental income received on your tax return.”

Consider working with a qualified tax preparer to make sure you properly make the calculation.

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This story was originally published on June 19. 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.