Calculating Capital Gains Tax on Sales of Property

If you ever bought assets at low cost and now they are worth more than what you paid for, you might be preparing to sell those assets. It feels incredible to get a high price for your investments. After all, the right property can be a source of revenue that can cover a lot of your expenses.

Here is another thing you must know. The IRS would like to get a part of your capital gains, i-e your capital gains are also subjected to taxation at the federal and state level.

If you don’t know what tax rate applies to capital gains, continue reading to understand what capital gains are, how they work and how you can calculate capital gains tax on sales of property.

What Are Capital Gains Taxes?

When you sell your assets for more than what you paid for, the earned profit is the capital gains.

If you earn profit from the sales of your assets such as stocks, real estate, businesses, and other types of investments, tax on the earned profit is capital gains tax. This is because whenever you sell your assets for profit, capital gains are considered your income that should be taxed.

This tax is applicable only when you sell your property. Therefore, if you keep your property and are not selling it, capital gains tax does not apply.

Short Term vs. Long Term Capital Gains Tax

Capital gains taxes are of two types depending on how long you hold your assets.

  • Short-Term

Short-term capital gains tax applies to profits you receive from selling assets that you hold for less than a year. The rate of short-term is equal to the ordinary income tax rate, i-e, according to your income tax bracket.

  • Long-Term

Long-term capital gains tax applies to profits received from the assets you hold for more than a year. The tax rate is 0%, 15%, or 20%, depending on your filing status and income. Generally, they are lower than short-term gains.

🡺 READ MORE: How to put a lien in a property.

How to Calculate Capital Gains Tax On Sales of Property?

Subtracting the amount you paid for the property from the sold amount cannot give you the capital gains. There are some things to consider.

You need to subtract the property cost basis from net proceeds to get the capital gains. It may result in a lesser tax burden than what you were expecting. 

The cost basis is the amount you paid for the property, the costs related to its purchase such as appraisal fee, legal fee, closing costs, and cost related to any improvement you made to the property.

Net proceeds refer to the cost associated with selling the property, such as home staging, house cleaning, real estate agent’s commission, lawyer fees, and transfer taxes. You need to subtract all such costs from the sales price to determine the net proceeds.

  • Capital gains = Cost basis- Net proceeds

If the final figure is negative, you are at a loss, and no tax applies.

If the final figure is positive, you gain profit, and tax applies. Now, check the capital gains tax rate to know your tax bracket.

Long-term rates for the 2021 tax year is 

Filing Status 0% Rate 15% Rate 20% Rate
Single Up to $40,400 $40,401 – $445,850 Over $445,850
Married filing jointly Up to $80,800 $80,801 – $501,600 Over $501,600
Married filing separately Up to $40,400 $40,401 – $250,800 Over $250,800
Head of household Up to $54,100 $54,101 – $473,750 Over $473,750

So, if your filing status is single, and capital gain is $40,401 – $445,850, you have to pay the tax at the rate of 15%.

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