How do I calculate my capital gain?

13 Replies

I’m closing on the sale of a duplex on Friday, and I’m trying to figure out how much I will need to set aside for capital gains taxes. How do I figure out my cost basis? What expenses raise my cost basis? For example can I subtract closing costs out of my gain? I’m going to a CPA at tax time, but I need to send the estimated amount to the IRS at the and of the quarter. Any advice would be greatly appreciated. P.S. I know about the 1031 exchange. I won’t be doing one for a variety of reasons pertaining to my particular situation and goals.
Originally posted by @Jonathan Hulen :
I’m closing on the sale of a duplex on Friday, and I’m trying to figure out how much I will need to set aside for capital gains taxes. How do I figure out my cost basis? What expenses raise my cost basis? For example can I subtract closing costs out of my gain? I’m going to a CPA at tax time, but I need to send the estimated amount to the IRS at the and of the quarter. Any advice would be greatly appreciated.

P.S. I know about the 1031 exchange. I won’t be doing one for a variety of reasons pertaining to my particular situation and goals.

 Is this rental property or flip?

@Jonathan Hulen

Your basis would be your purchase price plus some of the expenses from your closing statements.

Your basis includes the settlement fees, closing costs for buying property, improvements: see below. 

1) if any improvements were done to the house, add that. 

2) The following items are some of the settlement fees or closing costs you can include in the basis of your property.

  • Abstract fees (abstract of title fees).
  • Charges for installing utility services.
  • Legal fees (including title search and preparation
  • of the sales contract and deed).
  • Recording fees.
  • Surveys.
  • Transfer taxes.
  • Owner's title insurance.
  • Any amounts the seller owes that you agree to pay, such as back taxes or interest,
  • recording or mortgage fees,
  • charges for improvements or repairs,
  • and salescommissions.

Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

3) if there were other costs incurred to acquire the house such as if you spend money for tax advice, tickets to fly to look at the house( or milage) and such also gets added to the basis

You cannot include in your basis the fees and costs for getting a loan on a property. The following items are some settlement fees and closing costs you cannot include in the basis of the property.

1. Casualty insurance premiums.

2. Rent for occupancy of the property before closing.

3. Charges for utilities or other services related to occupancy of the property before closing.

4. Charges connected with getting a loan. Points and stuff. When you sell it, you can deduct the unamortized point. 

This will give you enough information to calculate tax payment. You professional will take care of the details later. 

@Jonathan Hulen ,

I suspect that because of the vague way you asked your question, you did not get a complete answer from @Ashish Acharya ,

You said that you are selling a rental property that you have owned since 2013.  During your period of ownership you took a depreciation expenses, right.  And, because you have been depreciating, you know what your original depreciation basis was for the dwelling structure and how much of your purchase price was allocated to the land at the time of your purchase.  

Now, if you add the original depreciation basis  to your cost of the land, you have your initial cost basis.  You an increase this basis by the amount of any improvements you made during your holding period, and also by certain closing costs as has already been mentioned.  You decrease your cost basis by the amount of depreciation you took or should have taken throughout your period of rental use.  This final number is what determines your capital gain.

Your sale price minus selling expenses is your sale proceeds.  Subtract the final number you calculated for your cost basis.  The difference is your capital gain.  The portion of your capital gain that does not exceed your depreciation expense is taxed at a maximum of 25%.  The portion of your capital gain that is greater than the depreciation you took or should have taken (whichever is greater) is your capital gain due to appreciation.   Gain due to appreciation is taxed at the long term capital gain rate applicable to your marginal tax bracket (use 15% as an estimate if you don't know for sure what your rate is).    

This is just an overview, hope it helps.

@Dave Toelkes , Stop being nice to me. I think I literally gave him what he asked (cost basis) rather than adjusted basis without using any common sense. My bad. 

@Jonathan Hulen

So, 

Cost basis ( you know what goes in this based on the previous reply) 

Plus: capital improvements

Less: all depreciation ( of cost basis and of capital improvement basis) 

= adjusted basis

TO CALCULATE CAP GAIN:

Sale price 

Less: adjusted basis

less: selling expenses ( commission, advertising) 

= capital gain. 

For eg, if your cap gain is 100k. and If you took 25k depreciation during your ownership. 

  • 25k is taxed at the max rate of 25% 
  • 75k is taxed at cap rate gain ( probably at 15% if you dont make more than around 450k) 
Originally posted by @Ashish Acharya :

@Jonathan Hulen

Your basis would be your purchase price plus some of the expenses from your closing statements.

Your basis includes the settlement fees, closing costs for buying property, improvements: see below. 

1) if any improvements were done to the house, add that. 

2) The following items are some of the settlement fees or closing costs you can include in the basis of your property.

  • Abstract fees (abstract of title fees).
  • Charges for installing utility services.
  • Legal fees (including title search and preparation
  • of the sales contract and deed).
  • Recording fees.
  • Surveys.
  • Transfer taxes.
  • Owner's title insurance.
  • Any amounts the seller owes that you agree to pay, such as back taxes or interest,
  • recording or mortgage fees,
  • charges for improvements or repairs,
  • and salescommissions.

Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

3) if there were other costs incurred to acquire the house such as if you spend money for tax advice, tickets to fly to look at the house( or milage) and such also gets added to the basis

You cannot include in your basis the fees and costs for getting a loan on a property. The following items are some settlement fees and closing costs you cannot include in the basis of the property.

1. Casualty insurance premiums.

2. Rent for occupancy of the property before closing.

3. Charges for utilities or other services related to occupancy of the property before closing.

4. Charges connected with getting a loan. Points and stuff. When you sell it, you can deduct the unamortized point. 

This will give you enough information to calculate tax payment. You professional will take care of the details later. 

 Is it accurate that if I don't sell my properties, I take all appropriate depreciation and I let the property go to my heirs, that they get the new cost basis of the then current value and have no capital gains to pay if they sell the properties right away?

Originally posted by Account Closed:

 Is it accurate that if I don't sell my properties, I take all appropriate depreciation and I let the property go to my heirs, that they get the new cost basis of the then current value and have no capital gains to pay if they sell the properties right away?

 yes

Originally posted by @Michael Plaks :
Originally posted by @Mike M.:

 Is it accurate that if I don't sell my properties, I take all appropriate depreciation and I let the property go to my heirs, that they get the new cost basis of the then current value and have no capital gains to pay if they sell the properties right away?

 yes

 Thanks. That's what my CPA thinks too.

There is a very popular thread on BP right now where everyone is agreeing or at least not objecting to the idea that their heirs will have to pay capital gains and they don't want to burden them with future taxes. I'll try to find it again and invite you to the thread to straighten things out, if you will.

Originally posted by @Ashish Acharya :

@Dave Toelkes , Stop being nice to me. I think I literally gave him what he asked (cost basis) rather than adjusted basis without using any common sense. My bad. 

 I have four rules I live by.  The second is:  Treat others with dignity and respect.  

Originally posted by Account Closed:
Originally posted by @Michael Plaks:
Originally posted by Account Closed:

 Is it accurate that if I don't sell my properties, I take all appropriate depreciation and I let the property go to my heirs, that they get the new cost basis of the then current value and have no capital gains to pay if they sell the properties right away?

 yes

 Thanks. That's what my CPA thinks too.

There is a very popular thread on BP right now where everyone is agreeing or at least not objecting to the idea that their heirs will have to pay capital gains and they don't want to burden them with future taxes. I'll try to find it again and invite you to the thread to straighten things out, if you will.

Ugh- this is why it's always worth it to talk to a tax pro. 

If you inherit a property you get stepped up basis to its FMV at date of death. If they then sell for FMV= no gain.

However if they GIFT it while they're still alive- the person will receive the person's original basis from way back when, and will likely have gain. 

Originally posted by @Dave Toelkes :
Originally posted by @Ashish Acharya:

@Dave Toelkes , Stop being nice to me. I think I literally gave him what he asked (cost basis) rather than adjusted basis without using any common sense. My bad. 

 I have four rules I live by.  The second is:  Treat others with dignity and respect.  

 Is the first one "Avoid Hurricanes"? 

Originally posted by @Ashish Acharya :

@Jonathan Hulen

Your basis would be your purchase price plus some of the expenses from your closing statements.

Your basis includes the settlement fees, closing costs for buying property, improvements: see below. 

1) if any improvements were done to the house, add that. 

2) The following items are some of the settlement fees or closing costs you can include in the basis of your property.

  • Abstract fees (abstract of title fees).
  • Charges for installing utility services.
  • Legal fees (including title search and preparation
  • of the sales contract and deed).
  • Recording fees.
  • Surveys.
  • Transfer taxes.
  • Owner's title insurance.
  • Any amounts the seller owes that you agree to pay, such as back taxes or interest,
  • recording or mortgage fees,
  • charges for improvements or repairs,
  • and salescommissions.

Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance.

3) if there were other costs incurred to acquire the house such as if you spend money for tax advice, tickets to fly to look at the house( or milage) and such also gets added to the basis

You cannot include in your basis the fees and costs for getting a loan on a property. The following items are some settlement fees and closing costs you cannot include in the basis of the property.

1. Casualty insurance premiums.

2. Rent for occupancy of the property before closing.

3. Charges for utilities or other services related to occupancy of the property before closing.

4. Charges connected with getting a loan. Points and stuff. When you sell it, you can deduct the unamortized point. 

This will give you enough information to calculate tax payment. You professional will take care of the details later. 

 This is a pretty good start, you'll also need factor in depreciation as that lowers your basis, and there's an additional tax on the depreciated amount as well that is sometimes at a higher rate than long-term capital gains. You'll need to check with your accountant to get an exact figure. The (theoretical worst case) max your capital gain would likely be would be your long-term capital gain rate times the selling price, so set aside at least that amount after closing and that would be a nice conservative reserve until you discuss with your CPA. You may also need to make an estimated tax payment depending on your financial and tax situation, so make sure to discuss with your CPA sooner than later.