How are capital gains calculated on real estate transactions?
Gain insights into how capital gains are calculated on real estate transactions and navigate real estate taxation.
Here are the key things to know about calculating capital gains on real estate:
- Capital gain = Sale price - Adjusted cost basis
- Adjusted cost basis includes the original purchase price plus improvements made over the years like a new roof, renovations etc. Costs for repairs and maintenance are not included.
- If the property was used for business or rented out, depreciation deducted over the years is "recaptured" by reducing the cost basis.
- If you lived in the property as a primary residence for at least 2 of the last 5 years before sale, you can exclude up to $250,000 of capital gains from tax (or $500,000 for married filing jointly).
- Any capital gains above the exclusion limits are taxed at 15% for most taxpayers, 20% for higher incomes.
- If the property was held less than a year, gains are taxed as ordinary income up to 37%.
- Capital losses on property can be used to offset capital gains, and up to $3,000 ordinary income.
- Keep all records related to purchase price, improvements, depreciation deductions, rental income/expenses to prove basis and exclusions.
- Consult a tax professional to understand how depreciation recapture and exclusions apply to your situation before filing your return.
Calculating Capital Gains on Real Estate: Understanding the Formula.
The formula for calculating capital gains on real estate is:
Capital Gain = Sale Price - Basis
Where:
- Sale Price is the amount of money you received for the property when you sold it.
- Basis is the original cost of the property, plus any capital improvements you made to it.
To calculate your basis, you will need to add up the following:
- The purchase price of the property
- Closing costs
- Any capital improvements you made to the property, such as a new roof or kitchen
You can reduce your basis by any depreciation you claimed on the property while you owned it.
Here is an example of how to calculate capital gains on real estate:
Purchase price: $200,000Closing costs: $5,000Capital improvements: $10,000Depreciation claimed: $20,000
Basis: $200,000 + $5,000 + $10,000 - $20,000 = $205,000
Sale price: $300,000
Capital gain: $300,000 - $205,000 = $95,000
It is important to note that capital gains on real estate may be subject to special tax rules. For example, if you sold your primary residence, you may be able to exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains from your taxable income.
If you have any questions about calculating capital gains on real estate, you should consult with a tax advisor.