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How It Works
Gain on sale is the difference between what you sell an asset for and its adjusted basis. A positive number is a gain (profit); a negative number is a loss. The adjusted basis accounts for the original cost, improvements, and depreciation.
For tax purposes, long-term gains (assets held over one year) are taxed at preferential rates of 0%, 15%, or 20%, while short-term gains are taxed as ordinary income.
Example Problem
You sell a rental property for $400,000. The adjusted basis is $310,000 (original $350,000 purchase + $20,000 improvements − $60,000 depreciation).
- GOS = $400,000 − $310,000 = $90,000 gain
Of this $90,000 gain, $60,000 would be subject to depreciation recapture (taxed at up to 25%) and the remaining $30,000 taxed at capital gains rates.
Frequently Asked Questions
How do you calculate gain on sale of real estate?
Subtract the adjusted basis from the sale price. The adjusted basis is your purchase price plus improvements minus accumulated depreciation. For a $500,000 sale with a $400,000 basis, the gain is $100,000.
What is depreciation recapture?
When you sell a depreciated asset for more than its adjusted basis, the IRS “recaptures” the depreciation you claimed. This portion is taxed at up to 25%, not the lower capital gains rate.
Can you avoid capital gains tax on real estate?
A 1031 exchange lets you defer capital gains by reinvesting proceeds into a like-kind property. The primary residence exclusion allows up to $250,000 ($500,000 for married couples) in tax-free gains.
Related Calculators
- Adjusted Basis Calculator — determine your asset's tax basis.
- Depreciation Calculator — compute annual depreciation deductions.
- Sales Tax Calculator — calculate sales tax on transactions.
- Capitalization Rate Calculator — evaluate investment return based on property value.
- Return on Equity Calculator — measure profit relative to owner equity.
Reference: IRS Publication 544 — Sales and Other Dispositions of Assets. Internal Revenue Service.