How to Estimate Your Capital Gains Taxes

How to Estimate Your Capital Gains Taxes

This How to Estimate Your Capital Gains Taxes  Before you can make any decisions about deferring capital gains taxes, you have to start by knowing the extent of your taxes. Any one particular method of deferring taxes may seem like too much trouble for a $10,000 tax savings, but it might be much more tolerable for a $50,000 tax savings, and for a $100,000 tax savings, it might seem the ideal solution. In fact, the extent of your tax liability will usually dictate how openminded you are about exploring options. With that in mind, it makes sense to start with a discussion of how you can estimate your own taxes.

To estimate your tax liability on the sale of a property, you have to know what the gain will be. The gain on a property is the difference between the net sales price and the adjusted basis on the property. The adjusted basis of a property is:

Original purchase price
+ Purchase expenses
+ Capital improvements
− Depreciation taken
= Adjusted basis

This information is usually calculated each year for filing your tax returns on a particular investment property; so most people just call their tax preparer and ask. You can also look at a previous tax return to see the amount of yearly depreciation and come up with a pretty good estimate.

Once you have your adjusted basis on the property, estimating the capital gain is fairly straightforward:

Sales price
− Selling expenses
− Adjusted basis
= Capital gain

Your capital gain on a property has two components: actual gain and recapture of depreciation. So before you can estimate the actual tax on the gain, you need to know how much of the gain will be considered recapture of depreciation. I’ve already covered the basic tax rate for capital gains, so if you have never taken any depreciation on the property, you can estimate your taxes now as simply 20 percent of your capital gain (plus state taxes). However, if you are like most people, you have taken the available depreciation on the property over the years and thereby reduced your adjusted basis. As such, your tax estimate will have to take into account the higher tax rate on the recaptureof depreciation portion of the gain.

Adjusted Basis Change over Time