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How Are Capital Gains Taxes On Rental Property Calculated

Investing in property is a worthy lifetime decision to make. When you invest in a long-term rental property, you can make some real income and profit on a nice windfall.

However, when you invest in property, you are also liable to pay capital gains taxes on the money you make from the investment.

If you want to save taxes on your first purchase it is better to consult a conveyancing solicitor who understands your requirements and offers you the best service.

How you Calculate Capital Gains on Real Estate 

When calculating the capital gains tax, you should subtract the cost basis. That is the original price of the house from the net profits of the final sale.

1. Cost basis 

The cost basis includes all the expenses like fees and closing costs at the time of purchasing the property and any other improvements you made on the property. Superficial repairs and routine property maintenance do not count on the cost basis deduction.

2. Net proceeds 

The net proceeds are the number of money investors walks away with after the closing cost is deducted. Any costs that accrue during the sale of the property are also deducted from the gross profits.

For example: In 2012, Dan bought an investment property for $300,000. The property sold for $600,000 the same year. His capital gains were $300,000 before subtracting improvement costs and expenses. Now, assuming Dan had the following associated expenses:

  • $65,000 in fees and commissions on the sale of the property  
  • $20,000 for new plumbing 
  • $8,000 in closing stock on the purchase of the rental property 
  • $12,000 cost on roof replacement 

In this case, we calculate Dan’s cost basis as follows 

Cost basis = $300,000 + $8,000+$12,000 

                = $320,000

The Net proceeds would be $ 535,000 = ($600,000 -$65,000) 

If you want to determine the total capital gains on the investment property, you deduct Dan’s cost basis from the net proceeds. 

Total Capital Gains = Net Proceeds – Cost Basis 

$215,000 (Total Capital Gains) = $535,000 (Net Proceeds) – $320,000(Cost Basis)

The property investor is liable to pay some percentage of the total capital gain, depending on the tax rate.

3. Total Returns on Investment 

Whenever an investor sells a rental property, they ought to know how much they should expect to pay as taxes and get an online rent receipt. In the case of Dan, we can calculate the capital gains taxes on Dan’s investment property as follows.

Dan is a single-filling taxpayer with an income of $120,000. Since Dan earns more than $78,750 per annum, he will be taxed on 15% of his total capital gain. 

                        $215,000 x 15% = $32,250 Capital Gains Taxes

Dan’s total return on investment is calculated as follows.

Total Capital Gains ($215,000) – Capital Gains Taxes ($32,250) = Total Returns on Investment ($182,750)

Final Thoughts 

Capital gains are the profits that you make out of selling your investment. Sometimes a tax season may roll around, and the capital gains taxes take half of your returns. This scenario is most likely to happen, and you should know what to do. 

Therefore, knowing how you can calculate capital gains on a rental property is vital when you plan to invest your money.

Ajeet Sharma, the founder of Financegab and a well-known name in the field of financial blogging. Blogging since 2017, he has the expertise and excellent knowledge about personal finance. Financegab is all about personal finance which aims to create awareness among people about personal finance and help them to make smart, well-informed financial decisions.


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