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The Basics: How to calculate capital gains tax
By Trevor Mauch | August 13, 2007
Some of our articles will focus on more in-depth and advanced topics, while others will 
simply get the basics out of the way.
One of the basics that all professional advisors and sellers should know how to do is calculate the capital gains and the capital gains tax that is due when selling a highly appreciated asset such as real estate, a business, or other valuable asset.
As you know, capital gains are basically the difference between what you paid for the asset versus what you sell it for. And… as the government usually likes to do, they like to take a piece of the pie whenever us hardworking investors and business people do well.
One large mis-conception about capital gains tax is that there is only one capital gains tax rate… currently (2007) the 15% federal capital gains tax rate. However, many sellers are surprised to find out that they are faced with much more than just the 15% federal capital gains tax rate.
Most states have some sort of STATE CAPITAL GAINS TAX that is in addition to any federal capital gains tax. Currently, the highest state capital gains tax rates are up over 9%, while some states have no state capital gains tax rate at all. You’ll have to check with your local state government to see if there is a state capital gains tax or not.
Find your state agency who handles taxes at the U.S. government website below:
http://www.business.gov/topic/Taxes
I need to quickly mention something about the federal capital gains tax rate as well. The 15% capital gains tax rate is the most common federal capital gains tax rate… it’s not the only capital gains tax rate.
Depending on your income and the type of asset your federal capital gains tax rate will vary.
Take a look at our quick federal capital gains tax rate guide to find out what rate you will pay.
Federal Capital Gains Tax Rates
So, now that you have found out exactly what your state and federal capital gains tax rates are, you simply need to gather up some numbers.
Let’s first calculate the capital gain on the sale:
How to Calculate the Capital Gain:
- Take the Sales Price and SUBTRACT the Cost Basis and the Cost of Sale
- (Sales Price - Cost Basis- Cost of Sale)
- Cost of Sale includes real estate commissions, closing fees, etc.
- The number you get when subtracting the Cost Basis and Cost of Sale is the capital gain on the asset. Simple huh?
Now, you’re probably saying, “what is the cost basis?”. Calculate the cost basis with the steps below:
How to Calculate the Cost Basis:
- Take the Original Purchase Price and ADD any Improvements (not expensed) and SUBTRACT the Depreciation (taken and/or allowed)
- (Purchase Price + Improvements - Depreciation)
Pretty simple. Then, just plug the Cost Basis into the Capital Gains calculation and you’re good to go.
If you would rather plug these numbers into a simple calculator that will spit out the numbers for you in a split second, take a look at a great capital gains calculator <<< here
Now, once you have the capital gain calculated for your asset, simply take the capital gains tax rate that applies to your sale and that is your capital gains tax due.
For example,
Let’s say that your capital gain is $500,000 and you live in California which has a 9.3% tax rate on capital gains (the same as the income tax rate). Your transaction and your income qualify you for the 15% federal capital gains tax rate… so in total, your sale will create a 24.3% capital gains tax.
On the $500,000 capital gain, that would mean a $121,500 capital gains tax bill due in the year of sale unless you decide to defer your tax or offset those taxes with other capital losses.
This quick lesson on calculating capital gains tax is designed to be a very simplistic way of doing it. Please be prewarned that there are other intracacies and rules that may affect how your capital gains tax is calculated.
So… if you are not 100% sure on your calculations, you should consult with your CPA or tax professional before completing the sale.
I hope that this simple and straightforward lesson has helped you to get a good grasp on how to calculate capital gains. If not, post a comment or question and I’ll be glad to answer your questions.
Topics: Calculations, Capital Gains, Selling Real Estate |