Keeping Records

• Maintaining detailed records is one of the best ways to prepare for the sale of a rental property. A spreadsheets or some kind of personal finance software program is perfect for this purpose. Information should include the purchase price of the building or unit, the current depreciation on your property, rental income, security deposits, management fees, repair costs and real estate taxes. By monitoring expenses, you will be in a better position to figure out the taxes owed when you sell.
  
  

The Meaning of Capital Gains

• With your monthly or yearly expense reports on hand, you can now examine the capital gains, which is another term for profits. These profits are categorized as short-term or long-term when you sell. The difference between them is that each category has its own tax amount. While short-term profits are taxed at the same rate as ordinary income, long-term capital gains receive a five to 15 percent tax, depending on your tax bracket.
  
  

Capital Gains Taxes and Depreciation

• The capital gains taxes on a rental property are much higher than on a personal use property. One of the reasons for this significant increase is due to the annual depreciation you may have claimed in your taxes. If the property has lost money over the years and you listed this loss in your taxes, you'll have to pay a larger capital gains tax once the sale is finalized.
  
  

Deferred Exchange

• A deferred exchange is one way to put off paying taxes temporarily. It allows the seller of an investment property to take the profits of the sale and purchase another piece of rental real estate without paying taxes. However, taxes will have to be paid once the second property is sold. An exchange facilitator or impartial third party must be used in this process, and there are strict guidelines that need to be followed, as well.