How to Calculate Capital Gains Tax on Rental Property

Knowing how to calculate capital gains tax on rental property is essential when you're selling it. Learn the correct method of calculating capital gains tax on rental property.


Previous Page: What is Capital Gains Tax on Rental Property?


Step 1: Calculate the Adjusted Basis for Your Property

Adjusted basis is the net value of a rental property after making tax adjustments listed in IRS's Publication 551.

Adjusted Basis =

Purchase Price + Purchase Costs + Property Improvement Costs + Selling Costs - Depreciation

Purchase Price: Amount paid when you bought the property

Purchase Costs: Transaction costs incurred when buying the rental property. This includes sale commissions, bank fees and legal fees

Property Improvement Costs: Amount spent on property renovations and maintenance

Sales Cost: Transaction costs incurred when selling the rental property. This includes advertising costs, sales commissions, bank fees and legal fees.

Depreciation: Since rental property owners are allowed to claim depreciation as tax deductions every year, they will have to add back the total amount of depreciation claimed when calculating capital gains tax - Click here to learn how depreciation of rental property affects your taxes.

Step 2: Calculate Capital Gains Tax on Rental Property

Capital Gains

Capital Gains Tax

= Selling Price of Rental Property - Adjusted Cost Basis

= (Capital Gains x Tax Rate) + (Depreciation x 25%)

Tax Rate: The tax rate can vary from 0% to 39.6% depending on two factors - Your income bracket and whether it is considered as a short or long term capital gains.

Tax Bracket

$0 – $8,925
$8,926 – $36,250
$36,251 – $87,850
$87,851 – $183,250
$183,251 – $398,350
$398,351 – $400,000
$400,001+

Short Term Capital Gains

10%
15%
25%
28%
33%
35%
39.6%

Long Term Capital Gains

0%
0%
15%
15%
15%
15%
20%

Short Term Capital Gains: Selling rental property for profits after owning it for less than one year. This is the same rate as ordinary income tax.

Long Term Capital Gains: Selling rental property after more than one year of ownership. The rates are lower to encourage long term property investments.

Rental Property Tax