How to Calculate Capital Gains Sale of Investment Property on Which Mortgage Is Owed?

The IRS taxes capital gains at a preferential tax rate to ordinary gains.

Whenever a taxpayer sells a capital asset, he will have a capital gain or loss. If the taxpayer has a holding period of less than a year, then the taxpayer will have a short-term capital gain or loss. If the taxpayer has a holding period of more than a year, then the taxpayer will have a long-term capital gain.

Instructions

1. Calculate the selling price for the mortgage by deducting any commissions or other fees associated with selling the capital asset. For example, a taxpayer sells a house for $300,000. After commissions and fees, the taxpayer receives $275,000.

2. Determine the basis in the capital asset. Generally, the basis in the property will be the original cost of the property. For example, the taxpayer bought the house for $200,000. This included a $50,000 basis. Mortgages are included in the basis if they are part of the cost for the property, so the basis if $200,000.

3. Subtract the selling price from the basis to determine gain. In the example, $275,000 minus $200,000 equals a $75,000 capital gain.

References

• IRS: Tax Topic 409, Capital Gains and Losses
• IRS: 10 Facts About Capital Gains and Losses
• IRS: Publication 544, Ordinary or Capital Gain or Loss