What Is Capital Gains in Real Estate?

Capital gains refer to the profit made when you sell a property for more than its original cost basis. Real estate investors track capital gains to understand their true return and potential tax obligations when selling.

How Capital Gains Work in Real Estate

Capital gains represent the difference between the property’s sale price and its adjusted cost basis. The adjusted basis factors in purchase price, acquisition costs, and certain improvements.

Formula:

Capital Gains = Sale Price − Adjusted Cost Basis

  • Higher appreciation leads to higher capital gains
  • Depreciation affects basis and may increase taxable gains
  • Investors evaluate capital gains when planning exit strategy
  • Long-term gains generally offer more favorable tax treatment

Example of Capital Gains

An investor buys a rental property for $300,000 and spends $30,000 on improvements. Their adjusted cost basis is $330,000.

If the property sells for $450,000:

Capital Gains = $450,000 − $330,000 = $120,000

This $120,000 represents the investor’s gain from the sale.

Capital Gains vs. Appreciation vs. Cost Basis

  • Capital Gains – The profit realized when selling property
  • Appreciation – Increase in value over time before sale
  • Cost Basis – The original cost plus improvements used to calculate gains

Appreciation contributes to capital gains, while cost basis determines how much of the sale price counts as gain.

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