How to Estimate Capital Gains Taxes on Real Estate

In the United States, individuals selling selling investment real estate typically pay capital gains taxes on the sale of the property. To estimate the federal capital gains taxes payable on the sale, taxpayers must know the estimated selling price of the property and the estimated selling costs, and must be able to calculate the basis (or tax cost) of the property.

Calculation of Basis

Step 1

Start your calculation of the basis with the original purchase price of your investment real estate, including any fees, costs or taxes that you paid to make the acquisition.

Step 2

Add to the original purchase price any improvements or additions you made to the real estate or costs you incurred related to the property, including equipment being sold with the property, that you did not previously deduct as a cost of the real estate. (These are known as capital additions.)

Step 3

Subtract from the original purchase price any depreciation or amortization costs you have incurred since the date you acquired the real estate. (These are typically incurred when property is rented.) The value you now have is the basis of your real estate.

Calculation of Capital Gain and Tax

Step 1

Start with your estimate of the sales price of the real estate.

Step 2

Subtract from the sales price of the real estate any costs incurred in the sale, including broker's fees and taxes paid by you as the seller.

Step 3

Subtract from the sales price of the real estate the basis calculated in Section 1. The value you obtain is the capital gain of the property. If the value is less than zero, you have a capital loss and no tax is due on the sale.

Step 4

Multiply the capital gain by your marginal long-term capital gains rate if you held the property for more than one year. For 2010, the long-term capital gains rate for taxpayers in a 15 percent ordinary income tax bracket is 0 percent, meaning that no tax is due on your sale. For taxpayers in a 25 percent or higher ordinary income tax bracket, the long-term capital gains tax rate is 15 percent.

Step 5

Multiply the capital gain by your ordinary income tax marginal rate if you held the property for one year or less. No special long-term capital gain tax rates are applicable in this case.

Tip

Income from the sale of rental real estate will increase the taxpayer's adjusted gross income (AGI). An increased AGI may affect the taxpayer's eligibility for income-based credits and deductions, such as the ability to deduct student loans.

Warning

The steps listed in the calculation of basis will hold for most taxpayers. For some taxpayers, the basis may be adjusted by unusual transactions, such as legal fees to defend the property title or insurance proceeds from property and casualty claims.

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