Understanding Capital Gains Tax

[Vic Vega]

Hey Everyone! So I'd like to gain some feedback from those who are fairly knowledgable in dealing with Capital Gain Tax on selling investment properties. From my current understanding Capital Gain Tax are assessed based on the price a home was purchased vs the price the home was sold, that profit amount is then taxed.

Curious though...Is the cost involved with rehab work considered as being a part of the total over cost of the property? For example, if a property is bought for 60,000 and requires 20,000 in rehab work equaling a total of 80,000. The property is then sold for 100,000, providing a profit to the investor of 20,000. Are capital gains based on 20,000 in profit or are the profits considered to be 40,000 in total based on the original purchase price of 60,000?

Does the time frame the property was owned by the investor matter in assessing Capital Gain Tax?

Thanks!

[Linda Weygant]

@Dave Foster and @Joe Splitrock are correct.  It sounds like what you are describing is a flipping business, which is a business not an investment.

Therefore, if your intent is to flip, then this is ordinary income and subject to self employment tax as well as income tax.

Your profits for this type of business are Selling Price - (Purchase Price + Rehab Costs + Holding Costs) = Profit.

If I'm reading your question incorrectly and you are talking about a property you have held as a rental for a while and you are then fixing it up and selling it, then this is capital gain tax.  The gain is calculated in the same manner with the exception of adding back in Depreciation Recapture, but is then taxed only at a capital gains rate.