If you own a piece of real estate for a year or more and realize a profit when you sell that property, you may have to pay long-term capital gains tax on that profit. How much tax you will have to pay depends on your cost basis in the property and on the tax rate you pay on other income. The Internal Revenue Service forms walk you through the process of calculating the tax on your capital gain, but if you have any doubts or questions, you should consult a professional tax preparer.
Determine your cost basis for the property. Add the price you originally paid for the property. This includes any sales tax, recording fees, commissions, legal fees or other settlement costs you paid at the time of purchase to complete the sale.
Add to your basis the cost of any improvements you made to the property. In order to qualify, these improvements must have a useful life of one year, and they must be designed to increase the value or usefulness of the property, to adapt it to another use or to lengthen the life of the property. Examples of qualifying expenses include putting on a new roof, adding a deck or bathroom or paving the driveway.
Subtract from your basis any deductions for depreciation you took on your taxes for business use of your home, any amounts you paid for improvements that was reimbursed by an insurance company and amounts you received in exchange for allowing an easement on the property.
Look at the Form 1099-S you received from your real estate broker, title company, real estate attorney or other person involved in executing the sale of your property. This form shows the gross proceeds you received from the sale. Subtract your total cost basis from the gross proceeds. If the result is a negative number, you have a capital loss. If the result is a positive number, this is the amount of your capital gain.
Add this amount to any other long-term capital gains you realized during the tax year, such as from the sale of other property or stock. Subtract any long-term capital losses. This is your total long-term capital gain. Report this amount on line 15 of Schedule D of Form 1040.
Add any short-term capital gains or losses from line 7, Schedule D, to your total long-term capital gain. The result is your net gain. Enter this figure on line 16 of Schedule D.
Complete the 28 percent rate gain workshop included in the instructions for Schedule D, if you have any gains or losses from the sale of collectibles, if you excluded any portion of a gain reported on form 8949 and if you have an long-term loss carryovers. Enter the total from this worksheet on line 18 of Schedule D.
Enter the total from Schedule D on line 13 of Form 1040. The gain is treated as part of your income and will be taxed at the rate of your other income.
Complete the rest of form 1040 and figure your tax owed on your total income.
- Up to $250,000 of gain from the sale of your primary home ($500,000 for married couples filing jointly) is excluded from capital gains tax, provided you have not previously excluded gain from the sale of a home and you lived in the house at least two of the previous five years.
- Capital gains tax is a complex subject with many factors that can affect the tax owed. Consult a tax professional if you have any doubts or questions.
Items you will need
- Paperwork from original purchase of property
- Receipts for improvements to property
- Form 1099-S from sale of property
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