How to Calculate Long-Term Capital Gain on Real Estate Investment

You must calculate capital gain when you sell an investment property.

When you sell a real estate investment property, you must calculate your capital gain, which typically results when you sell a property for more than its adjusted basis. The adjusted basis consists of the purchase price and certain costs you incurred during ownership. You must report and pay taxes on a capital gain to the IRS, which considers a capital gain long term if you hold a property for longer than a year before selling it. A larger long-term capital gain typically results in a higher tax payment than a lower capital gain.

Instructions

1. Determine the original cost of an investment property, the price for which you sold it after holding it for more than one year and the total selling expenses, which include expenses related to selling the property, such as attorney and escrow fees. For example, assume you bought an investment property for $100,000, sold it five years later for $300,000 and paid total selling expenses of $10,000.

2. Determine from your records the total improvements you made to the property during ownership and the accumulated depreciation, which is the total depreciation you took on the property during ownership. Improvements are expenditures, such as adding a room, that add to the property’s value or extend the property’s life. In this example, assume you spent $30,000 on improvements and had accumulated depreciation of $15,000.

3. Subtract your total selling expenses from the selling price. In this example, subtract $10,000 from $300,000 to get $290,000.

4. Subtract the original purchase cost from your result. In this example, subtract $100,000 from $290,000 to get $190,000.

5. Subtract the cost of improvements from your result. Then add accumulated depreciation to calculate your long-term capital gain. In this example, subtract $30,000 from $190,000 to get $160,000. Then add $15,000 to $160,000 to get $175,000 in long-term capital gain on the real estate investment.

Tips & Warnings

• The tax you pay on a long-term capital gain depends on your individual situation. Consult a tax adviser to determine how much tax you must pay based on your long-term capital gain.

References

• IRS: Topic 409 -- Capital Gains and Losses
• The Real Estate Investor's Tax Guide: What Every Investor Needs to Know to Maximize Profits -- Fourth Edition; Vernon Hoven; 2003