"What are the tax consequences of selling rental property?"

As a legal advisor, I can inform you that selling rental property could result in various tax consequences, which may depend on several factors, such as the duration of ownership, the sale price, and the property's improvement costs.

First of all, the gain or loss would be recognized on the sale of the rental property, which is the difference between the property's reported basis and the sale price. The owner's basis is the property's original purchase price, plus any acquisition fees, closing costs, and other expenses related to its purchase, minus any depreciation deductions taken over the years.

If the sale proceeds exceed the adjusted basis, it will result in a taxable capital gain. This gain could be short-term or long-term, depending on the owner's holding period. Short-term gains are taxed at the owner's ordinary income tax rate, while long-term gains are taxed at a lower capital gains tax rate, which is based on the owner's income level. On the other hand, if the sale proceeds are less than the adjusted basis, the owner will experience a tax loss that could be used to offset taxable income.

Moreover, if the rental property has been used for business purposes, the owner might have to pay a recapture tax. This tax is applied to the depreciation deductions that the owner has taken on the rental property over the years. If the property was sold at a gain, the recaptured depreciation would be taxed at a 25% rate. However, if it was sold at a loss, the owner could not claim it as a tax deduction.

Lastly, if the rental property was held for more than one year, the owner could take advantage of the Section 1031 tax-deferred exchange. This tax strategy allows the owner to defer payment of capital gains taxes by exchanging the rental property for another investment property of equal or greater value. However, very strict rules apply to Section 1031 exchanges, and a qualified intermediary must be used.

It is essential to seek the advice of a licensed attorney or tax professional for guidance on specific tax consequences and discuss strategies to minimize the tax burden.