Calculating Gain or Loss on Sale
Gain or loss is usually realized when a real estate property is sold or exchanged. A gain is the amount realized from a sale or exchange of property when the property is sold for more than its adjusted basis. A loss occurs when the amount realized from the sale or exchange is less than its adjusted basis.
The adjusted basis used for tax purposes is the value of the property when it was originally purchased including the amount of any acquisition costs or capital improvements made over time less any deductions that are taken for depreciation.
If the property is held for more than one year (a year-and-a-day) before being sold, the gain on the sale will be taxed at long-term capital gains rates. Real estate held for less than one year is taxed at the short-term rate, which is the ordinary income tax rates. The long-term capital gains tax rates for the year 2020 are shown below:
The capital gain is the amount by which the property’s selling price exceeds its initial purchase price adjusted for any capital improvements and or depreciation. A capital loss is the amount by which the property’s selling price is less than its adjusted basis.
To calculate the capital gain, divide the gain into two categories: (1) gain attributable to depreciation; and (2) gain attributable to appreciation. Any gain attributable to depreciation is taxed at a flat rate of 25 percent. Any gain attributable to appreciation is taxed at the capital gain rate shown above, assuming the property is held for longer than a year. There may also be additional capital gain taxes due depending on the state in which you live.
To defer all taxes from the sale of a property, which would include both depreciation recapture taxes and capital gain taxes, you might consider doing a 1031 Tax-deferred exchange.
ABOUT THE AUTHOR
Ken has been in the real estate business for over 40 years and has personally overseen the development and management of over $350 million worth of assets. Ken holds a B.S. degree in Accounting from Brigham Young University, a MBA from the University of Utah. Licensed real estate broker since 1976. He holds the following designations: CCIM, CPM, CRS,CCA. Served as the president of the Utah Apartment Association.