Real estate investors generally buy income property to sell it. It’s the name of the game; buy it low enough and sell it high enough to realize a gain. But in order to calculate the gain on your property (or, gain on sale), you will need to know your adjusted basis as well as your selling price. So let’s take a look.
According to the current tax code, the adjusted basis is the original cost of the property, plus capital improvements and costs of sale, less accumulated depreciation.
- Original Basis (the original purchase price for the real estate)
- Plus Cumulative Capital Improvements (additions made to the property)
- Plus Costs of Sale (costs to sell the real estate income property)
- Less Cumulative Depreciation (original property)
- Less Cumulative Depreciation (capital improvements made to the property)
- Equals Adjusted Basis at Sale
For example, if you purchase a rental income property for $300,000, the following year make $75,000 in capital improvements, and by the time you sell the property you have taken $21,000 in depreciation for the orignal real estate and $4,000 on the additions, wind up paying $25,000 to sell the property (real estate commissions and closing costs), your adjusted basis would compute like this:
- 300,000 + 75,000 + 25,000 – 21,000 – 4,000 = 375,000
Okay, now that we know the adjusted basis, we can find your gain on sale by taking the difference between the selling price and the adjusted basis.
- Selling Price
- Less Adjusted Basis
- Equals Gain on Sale
Let’s assume you sell the property for $500,000. Simply subtract the 375,000 adjusted basis from the 500,000 selling price to determine your gain: 500,000 – 375,000 = 125,000. Your gain on sale is $125,000.
It should be noted that ProAPOD does provide a report with these sale calculations included, but at this current time has not made it available on its website to preview. If you are interested in seeing a sample, please go to the Reports page at some later time and look for Sale Report under Sale & Acquisition (hopefully we will have linked and ready to view by then).
