📘 What is Capital Gains Tax?

Capital Gains Tax is a government levy applied to the profit earned from the sale of an asset, such as real estate. It’s triggered when you sell a property for more than what you originally paid for it, minus allowable expenses.

This tax is classified as either short-term or long-term, depending on how long the asset was held before the sale.

📌 When and Why It’s Used

Capital gains tax is applied when an investor disposes of a property and realizes a profit. It ensures that individuals pay a portion of their earnings from asset appreciation back to the government.

Understanding this tax is essential for real estate investors who aim to maximize returns and avoid surprise tax liabilities at the time of sale.

🧮 How It’s Calculated or Applied

To calculate capital gains tax, subtract your adjusted cost basis (which includes purchase price plus improvements and selling costs) from the property’s selling price. The result is your capital gain, which is then taxed based on how long you held the asset—short-term (taxed as ordinary income) or long-term (subject to favorable tax rates).

Primary residences may be partially exempt, and investors can use strategies like 1031 exchanges to defer the tax.

The actual tax owed depends on your income bracket and how long the asset was held.

✅ Pros

• Encourages long-term investing through lower tax rates on assets held over a year
• Offers tax deferral strategies like 1031 exchanges
• Primary residences may qualify for significant exemptions

⚠️ Cons

• Can significantly reduce net profits on appreciated properties
• Short-term capital gains are taxed at higher income tax rates
• Complex rules and exemptions require careful planning or professional help