sale of rental property

[Unregistered]

In figuring out the Cost Basis of the Property, we have the cost, repairs, closing cost, etc,
but what can we do with the balance of the mortgage due on the property. Does the mortgage play any part in the sale? The new owners did not assume it. Or is this considered part of our gain and we just have to pay it off? We're trying to reduce the gain on the property, We did add back in depreciation taken in the previous years.

Thank you

[Unregistered]

The mortgage is immaterial when figuring the cost basis or the gain on sale, if that's what you mean.

[rosieea]

In figuring out the Cost Basis of the Property, we have the cost, repairs, closing cost, etc,
but what can we do with the balance of the mortgage due on the property. Does the mortgage play any part in the sale? The new owners did not assume it. Or is this considered part of our gain and we just have to pay it off? We're trying to reduce the gain on the property, We did add back in depreciation taken in the previous years.

Thank you

Suppose you made a down payment of $20,000 and took out a mortgage of $80,000. Disregarding closing costs, your basis is $100,000. Now, suppose you sell the place for $150,000. Again, disregarding selling costs or depreciation, you have a gain of $50,000. If the mortgage was paid off prior to sale, you'd pocket the entire $150,00. However, if there was, say, a $70,000 principal balance remaining, the mortgage company would get $70,000 and you'd pocket the remaining $80,000.

[jainen]

Good example

Good example. That's called leverage. You make 50K on a 20K investment, a healthy yield rate of 150%. Of course, when property values go down you can lose money just as fast.

[Matt Sova]

Likewise

You bought the place for 100k w/20k down and mortgage of 80k, your basis is 100k. Not counting depreciation or closing costs. A year later it is worth 180k so you pull out 60k in equity in a refi so you can go to the bar and to Vegas. Assume both loans are interest only.

Now you owe 140k on a place you bought for 100k. You sell the place a year later for 140k. Your gain, in simple terms, is 140 - 100 or 40k. And you owe 140. Congratulations you have nothing left to pay the taxes.