Your taxable gain on the sale of real estate equals selling price less “adjusted basis.” (“AB”). AB is the cost of the property plus the cost of improvements less depreciation. So if you have depreciated property for many years, its adjusted basis may be much smaller. This gain resulting from depreciation is called “phantom gain”  Phantom gain may also result if you refinanced the property and spent the cash elsewhere. You may end up with little cash on the sale after you repay the mortgage loan and the taxes.

What do you do? There are many ways to reduce your tax. I look for ways to increase the “adjusted basis.” (“AB”). Each property is a little different and there are many factors that increase AB. For example, did you know that property that you inherited is treated as if your cost is its fair market value at the deceased person’s death? This is called a stepped-up basis. I suggest working with a tax professional

I recently prepared a tax return for a taxpayer and added over $50,000 to her AB as follows:

* She inherited the property recently and received a stepped-up basis.

* From the settlement sheet for the purchase of the property I added to AB transfer tax, abstract fees, taxes, surveys, recording, legal fees, and seller’s costs paid by the buyer. From the settlement sheet for the sale of the property, I found the commission and other costs.

* Don’t forget to include the cost of the property’s lot which should not have been depreciated.

* AB is increased by the cost of improvements to the property, like a new roof or appliances.

* There’s more.

If you have prior year unallowed passive losses on Form 8582 of your Form 1040, you should be entitled to offset those losses against your gain. If you are paid in installments on a business or investment property, you can pay taxes on gain proportionate to principle received each year.

Finally, if you enter into a “like-kind exchange” of the property, which may not be exchanged at all, you can delay the gain until the replacement property is sold. Property received in a previous like-kind exchange has a basis based on your AB in the previously replaced property. This situation is far beyond the scope of this article.