Hi everyone,
I have a client that purchased a rental home in 4/2017 that was paid off in cash in the amount of $265,000.00. In year 2018 he made a cash out refinance loan in the amount of $280,000.00, which he used this money to make some improvements in this home. He is planning to sell this rental home this year, and has an outstanding loan in the amount of $275,000.00. He is asking for advice in how much taxes he will pay if he decides to sale his rental home this year.
I'm in the process of calculated that for him, but for some reason I get confused in how to treat the outstanding balance of his loan. I'm aware that in order to calculate his capital gain or loss, I will need to first determine the adjusted basis of this home. I will consider the following: cost of basis + improvements+ expenses when purchased minus depreciation over the two years= adjusted basis. In his case it will look like this:
$265,000 Cost + $40,000 (improvements=expenses) - $16,528 depreciation=$288,472.00 (adjusted basis). If he sells this year, the value of the home is $465,000.00 - $288,472.00 (adjusted basis)=$176,528.00 gain. Do I need consider the amount of his outstanding loan on this calculation? He falls under the 15% tax bracket.
Please advise.