How does the IRS know a rental property was sold? Three ways some investors avoid paying tax when a rental property is sold is by willing the property to an heir, conducting a 1031 exchange, and offering seller financing.Selling a rental property may create tax liabilities for depreciation recapture and capital gains.Three steps followed to report the sale of a rental property are calculating capital gain or loss, completing Form 4797, and filing Schedule D with Form 1040 at the end of the tax year.Form 1099-S is filed with the IRS by the party responsible for closing a real estate transaction.Let’s begin by discussing how the IRS knows a rental property was sold in the first place. In this article, we’ll take a look at the IRS forms used to report the sale of a rental property, along with the potential tax liabilities and how to avoid them. While investors may wish to consult with a tax professional when reporting a sale, it can still be a good idea to understand how the process works. Reporting the sale of a rental property works differently than when selling a primary residence, because the IRS considers a rental property to be a business property and not a home.
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