How Do I Figure Capital Gains Tax on Real Estate?

In real estate, capital gains are the difference between the purchase price of your real estate and the price you sell it for. Capital gains tax is what you pay on that difference, after adjusting for a variety of exemptions, deductions and tax breaks. The tax on capital gains income is calculated separately from the tax on your regular income and often at a different rate. In addition to federal capital gains taxes, most states, including New York (Fed and State combined is 31.5%), tax the gains too.

1 ) Take the purchase price of your property and add the cost of any improvements, "Realty Times" advises. If you bought a rental home for $300,000, for instance, that would be the basis for calculating your gains. If you later spent $30,000 on capital improvements -- a new roof and a kitchen remodel, for instance -- then your basis goes up to $330,000. This applies only to substantial improvements that add to the home's value, not to repairs. Fixing a leaky shower isn't a capital improvement, but replacing it with a newer, better shower would be. If you've been billed with a special assessment for neighborhood improvements -- $500 toward a new sidewalk, for instance -- you can count those too.

2 ) Take your sale price and adjust for sale expenses. If you sell a property for, say, $400,000, you can subtract the costs of your real estate agent's commission, legal fees and any closing costs you agreed to pay, Realty Times states. If the total bill came to $25,000, your adjusted sale price would be $375,000.

3 ) Subtract your basis from the adjusted sale price. If you have a $330,000 adjusted purchase price and the adjusted sale price is $375,000, for instance, you have $45,000 in capital gains.

4 ) Check for any state and federal exemptions you're entitled to. For example, if you're selling a home you've lived in for two of the past five years, you can exempt up to $250,000 in capital gains from taxation -- $500,000 if you're married. Anything less than that won't be taxed.

5 ) Look at how long you've held the property. Short-term capital gains -- property that was sold less than a year after you bought it -- are taxed at the same rate as regular income, while long-term gains get a lower rate. If your taxable gain is $120,000, for example, and you're in the 25 percent tax bracket, you'd pay $30,000 if you sell after six months, but only 15 percent -- $18,000 -- if you hold on to the property for longer than a year.

Things You Will Need

• Records of property purchase
• Sale records
• Records of any capital improvements

Tip

• If you're adding capital improvements to your basis, make sure you keep detailed records of the money you spent, so that you can prove your tax report is legitimate.

References

• Bankrate: Capital Gains Home-Sale Tax Break a Boon For Owners
• Realty Times: Capital Gains--Determining Basis and Gains Easier Than You Think
• Invest FAQ: Capital Gains Tax Rate

Resources

• Bank Rate: Home Improvements Reduce Capital Gains Tax

Have you been thinking about selling your Real Estate? Now is the best time! Ask me about it.

Fernando Branco, GRI, ABR, CNE

Lic. Assoc. Real Estate Broker - NY

Lic. Real Estate Salesperson - CT

Realtor NY & CT

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Charles Rutenberg Realty

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William Raveis Real Estate, Mortgage & Insurance

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