Calculating Capital Gain

In the state of California, property owners who decide to sell an investment property are subject to the following taxes:

15% federal capital gains tax
9.3% state capital gains tax
25% depreciation recapture tax

Calculating the tax bill upon the sale of a property isn’t as hard as one might think, but it does require that you have a firm understanding of some basic principles. The first thing to understand is how to calculate the Adjusted Basis:

Formula	Example
Net Purchase Price	$500,000
(Depreciation)	($100,000)
Capital Improvements	+ $25,000
Adjusted Basis	$425,000

Calculating gain is the next step to figuring out your tax bill. Let's assume we sold our property for a net sales price of $1,000,000. With that assumption we calculate gain as follows:

Formula	Example
Net Sales Price	$1,000,000
(Adjusted Basis)	($425,000)
Gain	$575,000

With a computed gain of $575,000, we can now start applying the tax rates mentioned above to compute the total tax liability on the sale of the property:

Tax	Formula	Tax Owed
15% Federal Capital Gain	15% * (Gain - Depreciation)	$71,250
9.3% State Tax	9.3% * Gain	$53,475
25% Depreciation	25% * Depreciation	$25,000
Total Tax Bill		$149,725

Instead of receiving the money after the sale of real estate with a capital gains tax, the sale funds can instead be reinvested in other like-kind property real estate through a 1031 exchange.