Tax Musings of a Burbank CPA: How to Calculate Your Gain or Loss On Real Estate Sale

If you have real estate you are planning to sell, calculating any income taxes due on the sale becomes a priority. Whether you are selling a residence, a rental or an investment property (different taxes rules apply to each), calculating the gain or loss on the real estate is the first step to figuring out the taxes.

The gain or loss is calculated by subtracting your tax basis and selling expenses from the gross sales price of the property.   You calculate your tax basis by taking the original purchase price of the real estate plus any additional costs that were paid through the escrow (except real estate taxes, insurance and prepaid interest), then add any capital improvements made to the property (like adding a roof, pool, modernizing a kitchen, anything that improves the value of the property; regular maintenance doesn’t count) and any fixing up expenses made to the property to sell it.  If you have a rental, you have to deduct depreciation expense taken each year you rented the property.  This will give you your tax basis in the property.

Now look at your escrow – commissions, transfer taxes, escrow fees and any other expenses you are not planning to deduct on another schedule of your taxes would be considered selling expenses that can be deducted against the selling price of the property.  The net of all those calculations will give you the gain or loss on the sale of the real property.  Remember:  Selling price less tax basis less selling expenses equals gain or loss.  

In some ways it looks simple and in other ways kind of confusing, so if you are not sure, you might want to sit down with a tax preparer who is familiar with this type of real estate transaction and have them calculate it for you.  The price you pay will be worth making sure you don’t forget something and having to pay more tax than necessary or getting questioned by the IRS later on.

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