When you sell a piece of real estate for more than you paid for it you incur a capital gain. This gain can result in owing taxes. Being able to calculate this gain and the associated tax is very important for homeowners and real estate investors. It is wise to calculate your real estate capital gain to be prepared when filing taxes.
How to Calculate the Gain
The first step is to calculate the net proceeds from the sale of the property. This is done by taking the total sales price and deducting all approved costs directly associated with the sale. These costs include realtor commissions, title fees, surveys, and other costs incurred directly with the sale. This result is the net proceeds.
Next, calculate the adjusted basis of the property. This is figured by starting with the original purchase price. Then adjust it by subtracting any depreciation claimed over the ownership period of the property. Add in any capital improvements. This can include any additions (such as finishing a basement or adding a room). The net result is the adjusted basis of the property.
Finally, subtract the adjusted basis from the net proceeds. The result is a real estate capital gain.
Long-Term vs. Short-Term
If you owned the property for more than one year the gain will be considered long-term. Long-term gains are taxed at a lower rate than short-term gains. Short-term gains are taxed as ordinary income. It is wise to hold out and wait until the one-year mark to sell a property, if at all possible.
Ben Jones is an author, marketer, and entrepreneur. Follow him in his adventures by reading his blog.
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