1. What is Rental Property Capital Gains Tax?

Capital gains tax on rental property is composed of two parts: tax on the actual capital gain (sale price minus adjusted basis minus depreciation recapture) and tax on depreciation recapture (taxed at 25%). This calculator helps estimate your total tax liability when selling a rental property.

2. How Does the Calculator Work?

The calculator uses the following formula:

Where:

• \( Sale\ Price \) — Amount property was sold for
• \( Basis \) — Adjusted cost basis of the property
• \( Depreciation\ Recapture \) — Total depreciation taken during ownership
• \( Capital\ Gains\ Rate \) — Your applicable long-term capital gains rate (typically 15-20%)

Explanation: The first part calculates tax on your actual capital gain, while the second part calculates the mandatory 25% tax on depreciation recapture.

3. Importance of Calculating Capital Gains Tax

Details: Understanding your potential tax liability before selling helps with financial planning, determining if a 1031 exchange might be beneficial, and avoiding unexpected tax bills.

4. Using the Calculator

Tips: Enter the sale price, your adjusted cost basis (original price plus improvements minus land value), total depreciation taken, and your capital gains rate (typically 15% or 20% depending on income).

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between capital gains and depreciation recapture?
A: Capital gains tax applies to your profit on the sale, while depreciation recapture taxes the deductions you previously took at a higher rate.

Q2: Can I avoid capital gains tax on rental property?
A: You may defer taxes via a 1031 exchange or exclude gain if the property was once your primary residence (meeting certain conditions).

Q3: How is adjusted cost basis calculated?
A: Original purchase price plus capital improvements minus land value and minus any casualty losses or depreciation taken.

Q4: What if my capital gains rate is 0%?
A: While some taxpayers qualify for 0% capital gains rate, depreciation recapture is still taxed at 25% regardless of income level.

Q5: Does this calculator work for short-term capital gains?
A: No, this is for long-term holdings only (owned more than one year). Short-term gains are taxed as ordinary income.