Question

Calculating gain on sale of rental real estate

Forum|Forum|5 years ago
February 19, 2021
2 replies
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Program adds closing costs to cost basis. Shouldn't it reduce basis?

Employee

The program is correct. Closing costs should increase your basis, which will reduce your gain.

Ignoring depreciation recapture, Gain = proceeds - expenses of sale - adjusted cost basis

So the closing costs you paid to purchase the property and that you could not deduct previously are effectively deducted when you sell. Those costs are "capitalized."

On Form 4797 (Sale of Business Property), part III line 21 includes "Cost or other basis plus expense of sale." So it doesn't really matter where it goes as long as you tell TT about each expense.

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T

Taylor TeagueAuthor

When I record the transaction reflected on the "Hud" statement I debit these closing costs which increases my gain. Can not understand a justification for a credit here.

J

jtax

Employee

Are you using credit and debit as an account would (generally the opposite a normal person would).

How are you entering the data and where? Perhaps a couple of screenshots would help this volunteer forum figure out what is going on? (Be sure not to post names or SSN's).

You say TT is increasing your basis and yet at the same time increasing your gain. That cannot be. If your basis goes up, your gain goes down.

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T

Taylor TeagueAuthor

My entry in Quikbooks to record this sale on Sept 18 follows:

Bank 79,298.85 Proceeds

Bank 500.00 Reclass Dep

Acc/Dpr 17,867.51 Recap Depr

ProFees 150.00 Rec Fees

ProFees 170.00 Doc Fees

PropTax 218.85 Prepaid tax

Land 9225.00 Cr Fixed Asset

House 59,804.79 Cr Fixed Asset

Gain on Sale 33,337.72

TT calculates the gain at 28,157 if Section 1250 propety is selected. For some reason TT had previously selected "section 1245 property" and as this is real estate, I believe that is incorrect.