How to Figure Capital Gains Tax on Real Estate

Real estate profits are subject to capital gains tax just like other investment profits.

Many people become a little confused when it's time to figure capital gains tax on real estate. Actually, the process is essentially the same as for calculating capital gains tax on any other investment. Complications arise because figuring the cost basis of your investment involves several complex factors, as does determining the adjusted amount realized from sale of the property.

Things You'll Need

• Related financial records
• IRS Schedule D

Instructions

1. Determine the cost basis as of the time the property was purchased. Unless you inherited the property or received it as a gift, start with the purchase price (property received from inheritance or as a gift has no purchase price). Add in settlement costs. Examples of settlement fees include appraisal or survey fees, legal costs, filling fees and real estate agent commissions. Add closing costs. In some cases, you may also add points paid to the cost basis.

2. Adjust the cost basis as appropriate. Add any taxes paid that were outstanding when the property was purchased, plus expenses for repair of existing damage. If you made any improvements or additions to the property, add the amount to the cost basis. Subtract depreciation and casualty losses. You may not include mortgage interest or property taxes paid while you owned the property. If you have assumed a mortgage, add the principal on the mortgage to the cost basis.

3. Calculate the amount realized from the sale of the property. This is the total sale price less sales costs such as agent commissions, advertising and legal fees.

4. Subtract any exclusions you are qualified for from the amount realized (see References). For example, you may be entitled to exclude up to $250,000 for the sale of a home. This is the adjusted amount realized from the sale.

5. Subtract your adjusted cost basis from the adjusted amount realized from the sale. This is your capital gain on the investment you made in the property.

6. Fill out IRS Schedule D (Capital Gains and Losses). You'll enter each item making up your cost basis and amount realized from sale. Schedule D also allows you to determine how much (if any) of the capital gain qualifies as long-term capital gains. Follow the instructions for Schedule D to determine where to enter the taxable amount(s) on your tax return.

References

• Invvestopedia: Capital Gain
• IRS: Basis of Property (Publication 17, Chapter 13)
• H&R Block: Exclusions

Resources

• IRS: Schedule D (CapitalGains and Losses) PDF File
• Uncle Fed: Capital Gains on Real Property