Similar to accounting for property purchases, accounting for property sales can be quite complex, but is also important to ensuring that you don’t overpay or underpay on your taxes.
When you sell a property, your accounting journal entry has to remove the property and any associated capex from your balance sheet, clear out accumulated depreciation, clear out any associated loans, capitalized loan costs, and amortization associated with those, record the gain or loss on sale, and account for any costs related to the sale.
There are other factors at well that could affect your accounting, including on if the property is occupied by a renter at the time of sale, if the buyer paid a deposit, if you’re accounting on a cash or accrual basis, etc.
Unless you are experienced with accounting for property sales, we highly recommend that you consult with your accountant on how to properly account for a property sale. That being said, we provide the below framework and illustrative example so you can have an idea of what information you need, and how it generally works.
Example Scenario
- Purchased property for $120,000 5 years ago ($100k to buildings, $20k to land)
- Replaced the roof for $15,000
- Outstanding mortgage balance of $80,000
- Depreciated property every year, and capital improvements as well ($20,000)
- Property vacant when sold
- Sold property for $140,000
- Paid real estate agent 5% ($7,000)
The Gain on Sale in this case is the sale price of $140k minus the book value of $115k (100k Building + 20k Land + 15k roof - 20k depreciation) for a total gain of $25k.
Example Journal Entry
The journal entry in Azibo would be:
| Account Type | Category | Debit | Credit | Notes |
| Assets: Fixed Assets | Buildings & Other Depreciable Assets: Buildings | $100,000 | Building at original booked value | |
| Assets: Fixed Assets | Land: Land | $20,000 | Land are original booked value | |
| Assets: Fixed Assets | Buildings & Other Depreciable Assets: Roof | $15,000 | Roof replacement at original booked value | |
| Assets: Fixed Assets | Accumulated Depreciation: Accumulated Depreciation | $20,000 | Clear out accumulated depreciation from building and roof | |
| Liabilities: Long Term Liabilities | Mortgages & Loans: Mortgage Balances | $80,000 | Pay off the mortgage | |
| Expenses: Operating Expenses | Admin and other: Property Selling Cost | $7,000 | Agent commission | |
| Assets: Current Assets | Bank Accounts: Bank Checking | $53,000 | Funds received | |
| Income: Income | Other Income: Gain (Loss) on Sale/Disposition | $25,000 | Gain on sale | |
| Totals | $160,000 | $160,000 |
As you can see, these can be fairly complex so we recommend working with your accountant to make sure you do these properly.
Tax Considerations
Gains (or losses) from property sales are typically reported and taxed differently from the profit/loss on operating your rental properties. The sale of rental property is usually reported on Form 4707 or form 8949 along with Schedule D (vs Schedule E or Form 8825). The taxable capital gain incorporates the gain or loss on sale of the asset, depreciation recapture, and selling expenses. Keeping accurate records of these is crucial in order to properly pay your taxes.