How to record the sale of a rental property in your books
Record a sale in one entry from the settlement statement. Cash and the loan payoff go on the debit side with the accumulated depreciation and the selling costs. The land and the building come off the credit side at cost. The difference is your gain or loss. The tax on that gain is figured separately by your preparer, but the books need to be right first.
Start with the settlement statement
The settlement statement (closing disclosure) tells you the price, each selling cost, the loan payoff, prorations for taxes and rent, and the cash you received. Every figure in your entry comes from it. Get the final signed copy, not the draft from the day before, because numbers often move at the table.
Also pull three numbers from your own books: the cost of the land, the cost of the building plus capital improvements, and the accumulated depreciation. If you keep an improvements log, as in tracking capital improvements by unit, the building number is quick to find.
The sale entry
Example a made-up LLC sells a rental for $400,000. Selling costs are $24,000 and the loan payoff is $150,000, so the LLC receives $400,000 less $24,000 less $150,000, which is $226,000. On the books, land is $60,000, the building is $240,000 and accumulated depreciation is $50,000. Adjusted basis is $250,000.
| Account | Debit | Credit |
|---|---|---|
| Checking | $226,000 | |
| Mortgage payable | $150,000 | |
| Selling costs | $24,000 | |
| Accumulated depreciation | $50,000 | |
| Land | $60,000 | |
| Building | $240,000 | |
| Gain on sale | $150,000 | |
| Total | $450,000 | $450,000 |
The gain on sale line is the price less the adjusted basis: $400,000 less $250,000 is $150,000. The selling costs of $24,000 reduce it, so the net gain is $126,000. Debits and credits both add to $450,000, so the entry balances. After it, the land, building, accumulated depreciation and mortgage accounts for this property are all zero.
What the gain means for taxes
The $126,000 is not all taxed the same way. The $50,000 of depreciation you took (or could have taken) is treated separately. The IRS says gain on real property that comes from depreciation is "unrecaptured section 1250 gain," which has its own maximum rate, and the rest is taxed as capital gain. The rules are in IRS Publication 544, and the plain-language version is in depreciation recapture when you sell.
A sale of rental property is generally reported on Form 4797, and the settlement agent usually reports the sale on Form 1099-S. See the instructions for Form 4797. Your preparer completes those forms. What you give them is the settlement statement, the accumulated depreciation schedule, the improvements log and this entry.
If you plan to buy another rental, do not record the sale like this before talking to your preparer. A 1031 exchange changes the entries and has to be set up before closing.
The loose ends on closing day
- Security deposits: the buyer takes over the tenants' deposits, either by a credit on the statement or by you sending the money. Debit Security deposits held and credit the deposit bank account or the closing proceeds. See security deposit accounting.
- Prorated rent and tax: rent you collected for days after closing is owed to the buyer, and property tax you prepaid is owed back to you. Book each line as it appears on the statement, so the rent income and tax expense for the year are only for the days you owned the property.
- Final bills: utilities, insurance and any vendor invoices dated before closing still belong to this property's books.
- Prepaid insurance: if you cancel the policy and the insurer refunds the unused part, record the refund as a reduction of insurance expense.
Do not close the LLC's bank account on closing day. Keep it open until the last bill, the last deposit refund and the final tax documents are settled.
After the sale
- Reconcile the bank account through the closing date and the date of the final payments.
- Pay out what is left to the owner as a distribution, as in owner draws vs distributions. Pay any known final tax or fee first.
- File the year's Schedule E for the months you owned the property, or the LLC's return if it has several members.
- Keep the records for the sale. Publication 527 says to keep records that support the basis for as long as they matter, which includes the years after the sale return is filed. See how long to keep records.
Records for a sale carry more tax than any other year of ownership, so ask your preparer what they need before you start rebuilding the numbers.
Finally, run two checks before you hand over the file. The gain on sale in your books should equal the price less the adjusted basis, and the cash you booked should equal the cash on the bank statement for the closing date. If either one is off, look for a closing cost or a proration that was entered twice or left out. Fixing it now costs minutes, while a wrong gain on a filed return costs a correction.
How DoorKeeping handles it
Each property in DoorKeeping has its own books, so the sale entry removes that property's land, building, depreciation and loan without touching your other properties. Ask Claude or ChatGPT to read the settlement statement and propose the entry, then approve it with one tap. The owner statement shows the last month of income and expenses for the property. DoorKeeping does not give tax advice, so confirm the gain and the forms with your tax preparer.
Sources
- IRS, Publication 544, Sales and Other Dispositions of Assets, read Oct 30, 2026
- IRS, Instructions for Form 4797, Sales of Business Property, read Oct 30, 2026
- IRS, Publication 527, Residential Rental Property (2025), read Oct 30, 2026
Questions
- How do I record the sale of a rental property?
- Debit cash, the loan payoff, selling costs and accumulated depreciation, credit land and building at cost, and the difference is the gain or loss on sale.
- Is the whole gain taxed the same way?
- No. Gain from depreciation is unrecaptured section 1250 gain with its own maximum rate. The rest is capital gain. Your preparer splits it.
- Should I close the LLC bank account on closing day?
- Usually not. Keep it open until the final bills, deposit refunds and tax documents are settled.