What Are Capital Gains in Real Estate?

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Contributor, Benzinga
October 14, 2022

In real estate parlance, capital gains is a measure of how much money a given property is sold for in relation to its original purchase price. Every real estate purchase requires money (or capital), and the end goal of every real estate purchase is for the property to increase or appreciate in value over time. Once a property appreciates in value and the owner sells it, the difference between the new purchase price and the original purchase price is referred to as a capital gain. 

The term “capital gain” gets its name from the fact that if the property has appreciated, the original owner has made a profit, and thereby gained more capital than they had when they purchased it. Capital gains are important for a number of reasons. First of all, investors who have capital gains have, by definition, been successful in their endeavors. Secondly, and perhaps most importantly, capital gains are considered as income, and therefore subject to taxation through the capital gains tax.

The rate of the capital gains tax increases progressively from 0% to a maximum of 20%, depending on the tax bracket the property owner was in for the year they realized the capital gain. It’s important to realize, however, that these rates only apply to real estate held for more than a full year by the owner. Capital gains on real estate held for less than 12 months will be taxed at the standard rate for the original owner’s tax bracket, which can be as high as 37%.

Capital Gains Calculator

Investors can figure out their capital gains by using a simple formula. All one has to do is subtract the original purchase price of the property from the new purchase price. So, for example, if an investor buys a property for $100,000 and sells it for $500,000 ten years later, they have a capital gain of $400,000.

New purchase price          $500,000
- Orig. purchase price       $100,000
Capital gain                       $400,000

Capital Gains Example

A real estate investment trust (REIT) purchased an old factory building for $1,000,000 and converted it into a mixed-use development with retail suites on the bottom and luxury lofts above. After the conversion was done, another institutional fund purchased the building from the REIT for $10,000,000 and the REIT had a capital gain of $9,000,000

Q

How long do I have to buy another property to avoid capital gains?

A

You have 180 days to find and purchase another property that is similar to the one you sold.

Q

Is there a one-time capital gains exemption?

A

There is an exemption to the capital gains tax.  If you sell your primary resedence, the first $250,000 of your profits is exempt if you are single, and if you are married and filing jointly, $500,000 oif the profits is exempt.

 

Q

Do capital gains affect social security?

A

Capital gains do not affect social security because money from capital gains is not considered income so it does not affect your benefit.

About Eric McConnell

Eric McConnell is a real estate writer with a years-long passion for the real estate industry and the desire to help everyday people learn more about real estate investing. He is a graduate of Pepperdine University, where he earned a BA in journalism. 

After graduating, Eric embarked on a career in real estate where he spent over a decade as an agent for multi-family and commercial properties in Los Angeles. In his career, he’s worked on almost every side of a real estate transaction. He has represented buyers, sellers, property owners and renters and served as manager for commercial and residential properties. 

In 2019, Eric started sharing his experience with the wider world as a writer. He got his start writing and editing real estate lessons for prospective licensees before joining Benzinga in 2021. Since then he has written a variety of real estate material ranging from investment platform reviews to covering and analyzing breaking news in the real estate industry. His work has been published by Yahoo News on numerous occasions. 

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