Reviewed and updated October 16, 2026
Separate cash received from gain
A rental sale has at least two calculations: cash left after closing and taxable gain or loss. Loan repayment affects cash but generally does not determine gain. Start with the amount realized, reflecting the sale price and applicable selling expenses, and compare it with adjusted tax basis.
Adjusted basis usually begins with the allocated purchase cost, adds qualifying capital improvements and reflects other adjustments. Land and building must be distinguished. Repairs deducted in earlier years generally are not added to basis again.
Include depreciation history
Depreciation allowed or allowable generally reduces basis even if it was not actually claimed. Missing depreciation records therefore need attention before filing. The portion of gain attributable to depreciation can receive different federal treatment from other long-term gain.
For illustration, suppose applicable net sale proceeds are $400,000 and adjusted basis is $250,000 after improvements and depreciation. The preliminary gain is $150,000, before reviewing other adjustments and the character of each portion. A $200,000 mortgage payoff does not reduce that gain to zero.
Review special facts before closing
Personal use, a former main home, suspended passive losses, installment payments, related-party transfers and a potential like-kind exchange can change the analysis. A qualifying exchange has strict requirements and timing; it cannot simply be elected after completing an ordinary sale.
Gather the purchase and sale closing statements, improvement invoices, depreciation schedules, ownership history and prior rental returns. Review the expected tax and payment timing before committing the cash elsewhere. State tax and nonresident withholding may also apply where the property is located.
Official sources
This guide provides general information. The rules depend on the tax year, jurisdiction and your circumstances. Ask our team which filing or planning steps apply to you.
