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How to calculate capital gains tax on rental property

Updated March 23, 2017

The vast majority of your assets and investments are considered capital property, and rental property is no exception. To properly calculate your capital gain on rental property, you will need to know the selling price of the property, the adjusted basis, and capital improvement sum minus depreciation. All capital gains tax on rental property must be reported to avoid penalties. Capital gains on rental property is reported on Schedule D of Form 1040.

Occupy your rental property for two years of the five years you owned the property to qualify for the capital tax gain.

List your original property price on a sheet of paper. For example, if your purchase price was £195,000, list that price on a sheet of paper.

Subtract the cost of improvement to your rental property. For example, if your total improvement cost was £7,800, subtract this amount from the purchase price of £195,000.

Subtract the depreciation cost, such as property taxes, loan interest and all other costs that resulted in depreciation of the property value. For example, if your depreciation was £15,600, this would be subtracted from the purchase price of £195,000. Purchase price £195,000 - £7,800 - £15,600 = £171,600. This total is the adjusted basis.

Determine the fair market value. If the fair market value is £338,000, write down that amount.

Subtract your adjusted basis amount from the fair market value to get the taxable gain amount. For example, subtract £171,600 from £338,000.

Subtract the selling cost from the fair market value. If your selling cost was £2,275, subtract that amount to determine your capital gain on your rental property. For example, £338,000 - £171,600 - $ 3,500 = £164,125.

Tip

Make sure all the figures you use to determine the capital gains tax on your rental property are accurate. Seek the counsel of a certified public accountant (CPA).

Warning

Report all capital gains to avoid penalties.

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About the Author

Shandell Williams attend Spencer Academy in Columbus, GA and has continued her education through Florida Tech University. Williams is an avid reader and author of children’s books and learning curricula for educational organizations. Williams has written several business articles for Demand Studios throughout the course of her writing career.