6 Things you Need to Know: Rental Property and Taxes in Washington DC

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Rental properties can be a fantastic source of passive income, but eventually, it may come time to sell your property. The listing and sale process is likely familiar to you, but how will you handle the taxes? Rental property taxes at the time of sale work differently than property taxes for standard residential properties.

There are a lot of factors that go into how much you’ll pay in taxes at the time of your sale. Read on to learn about the different types of rental property taxes and how you’ll need to navigate those taxes. 

1. Capital Gains Tax 

There are two different types of tax you pay when you get ready to sell your rental property: capital gains tax and depreciation recapture tax. Your capital gains tax is based on how much the value of the home increased between when you bought it and when you sold it. In other words, this is tax collected on the profit you made off of the home while you owned it.

Your capital gains tax rate will depend on a variety of factors, including your tax bracket, your marital status, and how long you’ve owned the property. In general, capital gains taxes on properties you’ve owned for more than a year are around 15 or 20 percent. If you’ve owned the property for less than a year, you’ll pay closer to 37 percent. 

2. Depreciation Recapture Tax

You’ll also have to pay a depreciation recapture tax when you get ready to sell your rental home. Each year that you own a home, you can reduce its taxable value thanks to depreciation, or normal wear and tear on the home. This reduces your overall taxable income, meaning you pay less in taxes each year.

However, when you get ready to sell that asset that’s been reducing your taxable income, you’re going to make money off of it. The government will tax that income as a way to recover the money you’ve been saving thanks to the depreciation. Depreciation recapture tax rates are usually somewhere around 25 percent of the profit.

3. Increase Basis 

The other factor that will determine how much you pay in taxes when you sell rental property is your basis. The original basis for your property is the amount of money you spent to buy the property and to improve it. This can include the purchase price of the rental, as well as costs for remodels, landscaping, and so on.

If you can increase the basis of your property (your costs associated with buying it), you’ll reduce the amount of your capital gains. Because you put more money into the property, you won’t have as much profit to pay taxes on when you sell it.

Things that will increase your basis can include adding a new room, replacing the roof, adding or extending utility services, paving a street, escrow fees, and so on.

4. Decrease Basis

There are also a few ways you can decrease the basis of your rental property. This may increase the amount of capital gains tax you pay, as well as raising your depreciation recapture tax rates. In fact, subtracting depreciation from your net rental income is one of the top ways you can decrease the basis of your property.

You can also decrease your basis if you receive money for granting an easement on your property or if you get an insurance payment as reimbursement for a theft. If you use personal property in your rental, such as drapes or appliances, that can also decrease your basis. Keep in mind that the lower your basis is, the more you’ll have to pay in capital gains tax at the time of your sale. 

5. When You Adjust Your Basis 

While your basis is constantly in flux, it only gets officially adjusted at a couple of points throughout your ownership of the property. The first time your basis gets adjusted (or, rather, established) is when you buy the property. You’ll add the purchase property of the house, legal fees associated with the purchase, and any immediate capital improvements to get your original basis. 

Any major changes made to the property during the period that you own it will factor into the final basis adjustment. This adjustment will happen at the time of your sale. You’ll apply the adjustments over the period of time you’ve owned the property and then subtract the adjusted basis from your sale price for a final capital gains amount.

6. Benefits of Hiring a Pro

As you can see, navigating the taxes surrounding a rental property sale can be incredibly complicated. Not only will you have to deal with capital gains, depreciation recapture, and basis calculations, but you may want to use certain tax reduction strategies. These can help to lower your tax burden, but you have to make sure they’re handled correctly.

Hiring a professional to help you manage your rental property and taxes can save you a lot of headache. These experts know the tax law in your area and can help you make sure you don’t make any costly mistakes on your taxes. They can also help you figure out which tax reduction strategies will be the best fit for you and help you employ them.

Learn More About Rental Property Taxes 

Rental property taxes can be complex to deal with, involving capital gains taxes, depreciation recapture taxes, and more. You’ll have to calculate how your basis has increased or decreased and figure out how that factors into the two types of taxes. Hiring a professional to help you sort through this can keep you on the right side of the law and save you as much money as possible.

If you’d like to learn more about rental property taxes, check out the rest of our site at Nomadic Real Estate. We can help you with leasing, management, sales, and, most importantly, peace of mind.

Learn more about our property management services today and discover how we’ve helped thousands of landlords throughout D.C., Maryland, and northern Virginia.

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Enhanced Reporting

Your portal includes a selection of extremely useful reports. Reports are available in the “Reports” section, and are distinct from the financial statements. Unlike financial statements which are static records, Reports are dynamic real-time records that will update with current data every time you view them. 

Scroll down to learn more about Reports:

Navigate to the "Reports" module in your portal:

Owner Portal Reports
  • Keep in mind, these reports are dynamic records. They will refresh to display current information every time you view them. 

Enhanced Rent Roll Report:

Enhanced Rent Roll Report
  • The Enhanced Rent Roll Report will show the rent amount, last payment date, move-in date, lease expiration date, and security deposit amount for each of your tenants. 
  • It will also show a portfolio summary with occupancy percentage, vacancy loss, and more!

Unit Comparison Report:

Unit Comparison Report
  • If you own multiple units (or buildings) with Nomadic, you’ll get access to the Unit Comparison Report. 
  • This report enables you to quickly compare financial performance between your units at a glance without toggling between individual reports. 

Income Statement Month-Over-Month:

Income Statement by Month Report
  • The Income Statement Detail – Monthly Report serves as a month-over-month record of portfolio performance. You’ll see itemized income and expense categories and can track monthly. This report will update with fresh data every time you view it. 

Financial Statements

Financial statements will be published to your portal on a monthly basis. The statements are found in your Documents library, and provide a historical record of all financial performance. The statements serve as a snapshot of financial performance over a given period, and are static documents (unlike Reports, the statements do not update/change in real-time). 

Scroll down for more info about the Financial Statements in your Documents library:

The Documents area contains monthly financial statements:

Owner Portal Documents
  • The statements in the Documents are are static documents. They are posted to the portal once a month to serve as a historical record of financial performance. 

Download a statement to see month and YTD financials:

Owner Portal Property Statement

You'll also find a month-over-month operating statement:

Month over Month Statement

Portal Communication Tool

You can use your owner portal to communicate with our team. Any messages you send through the portal will go straight to your Account Manager. When we reply, you’ll get an email notification and you’ll also see the message in your portal next time you log in. 

Here’s an overview of using the communication platform:

Click "Communications" and navigate to "Conversations":

Commincation Dashboard Screenshot
  • The communications module will contain a record of all messages that you create through the portal. 

Click the "New Message" button and send your message:

Owner Portal New Message Screenshot

Responses will show up in the conversation ticket:

Portal Conversation Response Screenshot
  • You’ll get an email notification whenever you get a response, and you’ll also see the message in your portal next time you log in. 

You can reply in-line using the comment box:

Owner Portal Comment

Each conversation will be logged in its entirety:

Portal Conversation Snapshot

Understanding the Ledger

Your portal includes a ledger with all transactions. The ledger is populated with data in real-time as transactions flow through our accounting software. Much of this information is also available in the Reports area, as well as the Statements in your Documents library, but the ledger is the most comprehensive resource for diving into the details. 

Please scroll through the sections below to get a better understanding of how to interpret the ledger. 

By default, transactions are sorted chronologically:

Owner Ledger Dates
  • The date reflected in the lefthand column is the actual transaction date, not the “bill date”. This is the date the transaction was actually processed. 

If you have multiple properties with Nomadic, you'll see the address for each transaction in the "Location" column:

Ledger Property Column
  • You can filter the ledger to look at just one property, all properties, or specific sets of properties. 
  • If you only have one property with us, you’ll just see the ledger for that property. 

The Description column displays the transaction type:

Owner Ledger Description Column
  • BILL: this is an expense transaction, such as for repair costs or management fees.
  • CHARGE: this is a transaction  billed to the tenant, most typically a rent payment. 
  • NACHA EXPORT: this is a credit we processed to your distribution account. This type of transaction is how you get paid! 

The Amount column shows the dollar value of each transaction:

Owner Ledger Amount Column
  • Positive Amounts: if an amount is positive, it reflects a transaction that is payable to you. Typically, this will be a rent payment that we collected from your tenants. On occasion, a positive number could also signify a journal entry or credit adjustment. 
  • Negative Amounts:  if an amount is negative, this is a transaction that is either payable to Nomadic or is an amount that has already been paid to you. Typically this will be for repair costs or management/leasing fees. Owner draws (net distributions into your checking/savings account) also reflect as negative amounts, since they have already been paid to you. 

The Account Balance column shows a sum of positive/negative transactions at a given point in time:

Owner Ledger Account Balance Column
  • Account Balance should always equal zero after a net distribution has been processed. When the balance is zero, this means that all expenses have been paid and you’ve received the remainder as net operating income, leaving a balance of zero (meaning: no one is due any money, as all funds have been distributed appropriately). 

Navigating the Propertyware Owner Portal

Your portal includes some extremely useful features that help you understand your property’s financial performance at a new level, with real-time transparency into every transaction.

Scroll through the snapshots below for an overview of portal navigation! If you need more help or have specific questions about using the portal, you can reach out to your Account Manager any time for a screen share. 

You can filter all info by date range or property:

PW Portal Filters

View a snapshot of income and expenses on your dashboard:

PW Owner Dashboard View

See every transaction in real-time on your ledger:

Owner Portal Ledger View

Statements and forms will be posted to your documents library:

Owner Portal Document Library

View a suite of real-time financial reports:

Portal Reports View

See a running list of all bills, and drill down for more detail:

Owner Portal Bills View

Under Bill Details, you'll find dates/descriptions/amounts and more:

Portal Bill Details

You can also communicate with your Account Manager through the portal:

Owner Portal Communication Tools

How do net distributions work?

Net distributions keep your accounting clean and simple. Each month we’ll collect rent from the tenants, deduct any repair expenses for the previous month and any management/leasing fees for the current month, and credit the remaining net operating income to your account. 

Net Distribution

You’ll receive a statement via email each time a net distribution is processed, and can view all transaction details in your Propertyware owner portal.