Calculating Capital Gains Tax

Many people are unaware that selling an investment property is different than selling their primary residence. Upon the sale of a property, other than your primary residence, one may incur a tax liability in the form of capital gains tax. Capital gains tax is paid on the capital gain, not equity or profit. To calculate capital gain, simply subtract the adjusted basis from the net sale price. The net sales price is the gross sales price minus any standard transaction costs.

In order to determine your adjusted basis you must first establish your original cost basis. Your original cost basis is usually the initial purchase price of the property. To the original cost basis add the cost of improvements made to the property. From this number subtract all depreciation taken since you bought the property, the remainder is your adjusted basis.

Subtract your adjusted basis from your net sales price to figure the estimated capital gain on your property. Once you have figured out your capital gain, multiply the capital gain by the applicable state and federal capital gains rates to determine your estimated tax liability. The following is an example of how to calculate capital gains tax on the sale of a property:

Sam Seller is faced with a large capital gain tax liability. By engaging in a 1031 tax deferred exchange our investor Sam Seller can defer paying $69,000 in taxes, and instead reinvest all of the sale proceeds into a new property.

**The rate varies by state. The number used in the above example is for demonstration only.
You must consult your accountant for an accurate state rate.

***This not intend be tax advice. Please consult your accountant or attorney.

This article was contributed by attorney Stacy Johnson of Heartland Exchange, LLC.
Contact Stacy to find out if a 1031 tax deferred real estate exchange is right for you.

Stacy Johnson
218-824-6846 Phone
800-995-1034 Toll Free
sjohnson@heartland1031.com
http://www.heartland1031.com