What is Capital Gains Tax?
Capital Gains Tax (CGT) is a tax on profit from selling assets like real estate. You pay tax only on your gain (selling price minus purchase price and eligible expenses), not the total sale amount.
Key Formula:
Capital Gain = Net Sale Price – Adjusted Cost Basis
PART 1: RESIDENTIAL REAL ESTATE
Primary Residence Exclusion
The biggest tax break for homeowners: Exclude up to $250,000 (single) or $500,000 (married) of gain if:
- You owned AND lived in the home as primary residence for 2 of last 5 years
- Generally limited to once every 2 years
Real-Life Example: Married Homeowners
| Purchase Price (2015) | $400,000 |
| Capital Improvements | + $100,000 |
| Adjusted Cost Basis | $500,000 |
| Sale Price (2024) | $1,100,000 |
| Selling Costs | – $45,000 |
| Net Sale Price | $1,055,000 |
| Capital Gain | $555,000 |
| Primary Residence Exclusion | – $500,000 |
| Taxable Gain | $55,000 |
Tax Due: ≈ $8,250 (15% federal rate) + state tax
Investment Properties & Rentals
No primary residence exclusion. Must account for depreciation recapture taxed at 25%.
Real-Life Example: Rental Condo Sale
| Purchase Price (2015) | $300,000 |
| Depreciation Claimed (9 years) | – $78,545 |
| Adjusted Cost Basis | $221,455 |
| Net Sale Price (2024) | $470,000 |
| Total Capital Gain | $248,545 |
| → Depreciation Recapture (25%) | $78,545 |
| → Long-Term Capital Gain (15%) | $170,000 |
| Total Federal Tax | $45,136 |
PART 2: COMMERCIAL REAL ESTATE
Commercial Property Basics
- No primary residence exclusion
- 39-year depreciation period
- Depreciation recapture applies
- Cost segregation accelerates depreciation
Real-Life Example: Office Building Sale
| Purchase Price (2018) | $2,500,000 |
| Depreciation Claimed (5 years) | – $403,077* |
| Adjusted Cost Basis | $2,096,923 |
| Net Sale Price (2024) | $3,100,000 |
| Total Capital Gain | $1,003,077 |
| → Depreciation Recapture (25%) | $403,077 |
| → Long-Term Capital Gain (15%) | $600,000 |
| Total Federal Tax | $190,769 |
*Higher depreciation due to cost segregation study
1031 Exchange Strategy
Defer ALL capital gains tax by reinvesting proceeds into “like-kind” property within strict timelines:
45-Day Rule
Identify replacement property within 45 days of sale
180-Day Rule
Complete purchase within 180 days of sale
1031 Exchange Success Story
| Without 1031 Exchange: | $212,500 Tax Due |
| Warehouse Sold (Gain: $1,150,000) | |
| WITH 1031 Exchange: | $0 Tax Due |
| → Proceeds reinvested in $2M retail plaza | |
| → Taxes deferred until future sale | |
7 Tax-Saving Strategies
1. Hold >1 Year
Qualify for lower long-term rates
2. Maximize Basis
Track all eligible costs
3. 1031 Exchange
Defer commercial gains
4. Installment Sales
Spread gains over years
Important Disclaimer
This guide provides general information only. Tax laws change frequently and vary by location. Always consult a CPA or tax attorney before making real estate decisions. Individual circumstances dramatically impact tax outcomes.
