If you're considering selling your rental property, you may be wondering what the future holds. Will you be required to pay taxes on the sale and, if so, how much? The answer is not as clear-cut as it might seem. Here's a guide for understanding how tax laws will affect your decision to selling a rental property.

In most states, property owners are responsible for paying property taxes on their properties; they don’t have to pay any sales tax on them. However, in some states (for example New Jersey), there is also a state tax that applies which can be quite substantial if it crosses into certain thresholds.

When selling a property, you are required to pay capital gains taxes on the increase in value of the property. This is because a capital gain is said to have happened when your property was sold for a price higher than what you originally paid for it. The capital gains tax is calculated by subtracting the original price of the property and any expenses paid prior to selling it from what you received from its sale.

If real estate investors had always been responsible for paying capital gains taxes on their properties, things would be quite simple. However, this wasn’t always the case; laws regarding capital gains had changed over time.

Fortunately, the Protecting Americans from Tax Hikes Act of 2015 (PATH) made things easier for investors. It brought back the "like-kind exchange" to allow investors to defer capital gains taxes until they sell their property as a like-kind exchange or until December 31, 2017 (for taxpayers who have held onto their properties since before July 1, 2014).

In order to qualify for the like-kind exchange, you must meet certain requirements:

The property that you currently possess has already been purchased as an investment. You decide to sell that property and choose a different one – also as an investment. Both properties are classed as real estate which is used for rental purposes.

The qualifying property must be eligible for the like-kind exchange and cannot be subject to depreciation (this means that it can’t have depreciated more than 50% of its value). The property must also be located in one of the following: All states except New Jersey. New York City.

You have owned the qualifying real estate property for a total of five years or longer (not necessarily consecutively). You can use rollovers to avoid paying taxes on current capital gains. You can also choose a different kind of real estate that is eligible as a like-kind exchange. For example, if you sold an investment property and bought another investment property, you would not be limited to just one kind of real estate.

Regardless of how long you’ve owned the property, be sure to include any improvements you’ve made to it, as well as any mortgages or other debts that are related to it. If your loans for improving the property were part of what caused the increase in its value, these will also have to be counted when calculating the amount of capital gains taxes that you must pay on your sale.

Since acquiring one investment property is enough for qualifying for a like-kind exchange, acquiring additional properties can lead to having two or more properties qualify. The more properties you already own, the more capital gains taxes you’ll have to pay on them.

What happens if you don’t choose to defer your capital gains tax?

If you were not required to pay capital gains taxes before but are required to now, all of your profits will be taxed at a rate equal to the highest marginal tax rate. For example, if you are in the 25% tax bracket (which is where most people end up on their first year of investing), after selling a $100,000 property and receiving $300,000 in profit, you will have paid $1 million in taxes for that year.

If you end up owing capital gains taxes, this means that you will have to pay interest on the amount that you did not pay. If you fail to pay the taxes before the due date, interest accrues on a daily basis. If it exceeds a certain level (determined by your marginal tax rate), it can extend to include penalties and interest.

For example: If you’re in the 25% tax bracket, and start paying income taxes late, they will charge 1% of the unpaid tax (which is 10% of $1 million) for each day that you are late in paying until it reaches 30%. The remaining amount will be subject to penalty and/or interest.

If you fail to pay any portion of the taxes owed on time, they can even go after your assets. Some states, such as California, can even seize real estate. The Protecting Americans from Tax Hikes Act of 2015 (PATH) has made it possible for investors to defer capital gains taxes until December 31 of 2017 and until they sell their property; under PATH, professional investors are exempt from paying capital gains taxes on their property if:

They don’t own more than 15 investment properties. They were not required to pay capital gains taxes on their previous properties. They do not have any other sources of income that exceed $250,000 per year (for joint filers).

6 Signs The Time is Right to Sell the property

If you feel like it’s time to make a decision about your property, make sure you pay attention to the following things before putting your property on the market i.e. before selling a rental property or any other:

#1) The price you originally paid for the property is now much higher than what it’s worth.

If you purchased in a questionable area and the value of the property decreased, it could be time to proceed with selling. However, make sure that you aren’t just using your gut feeling – if the value has increased overall in your area then the benefits might outweigh any costs you might have incurred initially.

#2) You can see that your local real estate market is slowing down.

If you have been in the market for a while, you should be able to tell if your area is starting to slow down. For example, if the number of properties on the market has increased significantly or if there is a lot of deferred maintenance on existing properties, then this might be a sign that your area’s real estate market is slowing down. If it’s time to sell, make sure you consider how much your property will be worth at this slower pace.

#3) You can no longer afford to hold onto the property.

The monthly costs of the property are starting to outweigh the benefits. You may have other opportunities that could earn a better return on your investment. For example, if you’ve been watching some of your friends who have also purchased properties in the same area invest in stocks or bonds, you might be able to earn more from those investments than by holding onto your property.

#4) The interest rates have dropped significantly since you purchased them.

You might be able to refinance and get a much better rate which would help reduce your expenses and make it easier for you to manage the property.

#5) The property has been on the market for a long time and it hasn’t sold.

With any type of real estate, getting your home on the market early will help you get the best price. However, if your property hasn’t sold in months, then this could be a sign that there are several reasons why your property hasn’t sold. Could it be that you have priced it too low? Could it be that there are some serious issues with the property (such as mold or faulty utilities)? Only you and a qualified professional can answer these questions with certainty. It’s important to see if there is anything you can do to make your home more attractive for potential buyers. For example, could you renovate it to make it more attractive? In some cases, it might also be a good idea to consider getting another property that is in the same area.

#6) You simply want to sell!

If it’s time to sell, then this is the best time. The market is slow at the moment and there are many people who could benefit from having an old home that they can use as their primary residence or as a rental property. If you’ve been watching for months and nothing has sold, then you might want to reconsider your decision.

Selling your property is not an easy decision to make. When you’re in the process of selling, it’s important to look at all potential scenarios and see if they are favorable for you. In addition, it might also be a good idea to consider checking out the current market conditions in your area.

Steps to Take Before Selling A Rental Property

Before putting your property on the market, there are several things you should do to prepare for your sale. These steps include:

1) Make an estimate of what you could receive from selling (based on today’s market conditions).

If the current market conditions are similar to those in previous years, your estimate might include:

A) What you’d receive in state income tax (if applicable).

B) How much of the principal amount would be due to you immediately or over time.

2) Take out a home equity loan to pay off any remaining debt.

If you have a mortgage on your property, you should set up an agreement with your lender that states that you will repay the balance by selling the property. Once you sell the property, there is no obligation for your lender to continue paying any of the outstanding principal balance on your mortgage.

3) Store your furniture.

If you have a large item that you purchased for the property, it might be a good idea to store it with your family until the sale is finalized. You don’t want to end up with something so big that it takes up space in your basement or garage when you are trying to sell the property.

4) Reimburse the expenses that you have incurred during the year (if applicable).

Some states have laws that require you to reimburse any tax incentives or other costs that are associated with selling your property.

These are the things that you should look into or consider before you look forward to selling a rental property.

For more information, you can visit Real Estate Calculators.