How Much Are Taxes on the Sale of a Rental Property in Massachusetts?

rental property taxes

A rental property is a wonderful asset to hold but can be a large tax liability when it comes time to sell. Whether you have one rental property or twenty, the IRS sees your rental property as a business investment. You need to be smart not to end up handing over a large portion of your profit to them.

The good news is that minimizing how much tax you pay on the sale of a rental property in Massachusetts isn’t complicated. Read on to find out what you’ll need to pay and ways to make the entire process easier and more profitable.

What taxes do I need to pay when I sell a rental property in Massachusetts?

There are two main taxes you’ll need to pay from the sale of your rental property:

  • Capital gains tax – you’ll be charged a rate between 0% and 20% depending on your taxable income
  • Depreciation recapture – at a maximum rate of 25%

What is capital gains tax?

Capital gain is the difference between what you purchased something for (in this case your rental property) and what you sold it for. For example, if you bought your rental house for $200,000 and sold it for $400,000, your capital gain would be $200,000.

Now don’t panic – just like any other business, the expenses you’ve incurred while owning the property (such as renovations and any expenses incurred while selling the property) can be used to adjust your capital gains tax total.

For example, in our example above, if you spent $75,000 putting in a new kitchen and making other minor improvements over the years, your capital gains reduce to $125,000. Make sure you have (or find) records of these improvements or an audit will be an uncomfortable experience.

How much capital gains tax will I have to pay on my rental property?

You’ll pay 0%, 15%, or 20%, depending on how much money you make (the following is accurate as of December 2022):

  • If you earn $41,675 or less a year (or $84,350 or less as a couple), your rate is 0%
  • If you earn between $41,676 and $459,750 a year (or $83,351 and $517,200 as a couple) your rate is 15%
  • If you earn over $459,750 (or over $517,200 as a couple) your rate is 20%

(These numbers are slightly different for married couples filing separately and for heads of household.)

If you have owned your rental property for less than a year, you’re instead subject to short-term capital gains tax, which is usually the same rate as your income tax.

Short-term capital gains rates are as follows:

  • 10% for those earning up to $10,275 (up to $20,550 for couples)
  • 12% for those earning between $10,276 to $41,775 (up to $83,550 for couples)
  • 22% for those earning between $41,776 to $89,075 (up to $178,150 for couples)
  • 24% for those earning between $89,076 to $170,050 (up to $340,100 for couples)
  • 32% for those earning between $170,051 to $215,950 (up to $431,900 for couples)
  • 35% for those earning between $215,951 to $539,900 (up to $647,850 for couples)
  • 37% for those earning $539,901 or more ($647,851 or more)

(Again, these numbers are slightly different for married couples filing separately and for heads of household.)

You’ll then need to add a 5% state capital gains tax. (Note that this increases to 12% for short-term capital gains.)

So for most people, you’ll be paying between 5% and 20% capital gains tax on your profit. So, of the $125,000 profit in our example, you’d be likely to pay either $6,250 or $25,000.

What is Depreciation Recapture?

Depreciation recapture can be a difficult concept to understand, so if in doubt, consult an accountant who can ensure you don’t pay more tax during a year in which you sell an asset (such as your rental home) than you need to.

Essentially, depreciation recapture is the way the IRS ensures they can tax you on the sale of any profitable asset you may have previously used to offset your income. If you previously used the depreciation of your rental property to offset some of your income, this will apply to you.

How do I pay less tax when I sell my rental property in Massachusetts?

We are not accountants, so we highly recommend you reach out to a financial professional to find out what is possible for you in your situation. Here are a few ways to research further to see if they are applicable to your situation:

  • Tax-loss harvesting – this is where you sell another asset at a loss to reduce your tax liability
  • Installment sale – if you own your rental property outright, an installment sale. While this won’t help you avoid your tax liability, it will spread it out over time. This is also known as seller financing for buyers
  • 1031 tax-deferred exchange – an IRS Section 1031 allows you to defer your taxes on your capital gains provided you are going to buy another rental property within 180 days of selling your current rental property

Sell Your Rental Property Fast in Massachusetts

It can be a tough decision to decide to sell your rental property, but if your property is losing you money or is sapping your time and energy, it may be time to liquidate the asset so you can reinvest your money elsewhere. By far the fastest way to sell a rental property is to sell it to another investor. If you’re looking to sell your rental property in Massachusetts as soon as possible, why not reach out to us for an offer?

We buy properties in any condition (good or bad!) in Massachusetts, and we’re always interested in acquiring a new rental property. All you need to do is reach out to us with some details about your property and we’ll give you a call with an offer. You’re under no obligation to accept, but if you do, we can close in as little as 2 weeks. To learn more or to get your offer, click here. 

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