In the first part of this blog i explained how capital gains were calculated in words now i will show it you mathematically. There are three steps to arrive to the result which is whether is capital gain is a net gain or a net loss. There are three steps in the equation to calculate this figure. (1) Calculation of the Adjusted Cost Basis of the Property (2) Calculation of the Adjusted Selling Price of the Property (3) THe Determination if the capital gain is at a loss (-) or a profit (+).
(1) Adjusted Cost Basis of the Property :
: add the cost of improvements and subtract the depreciation from the property
: Purchase Price (cost basis) = $600,000.00
: Add the cost of improvements = + $100,000.00
= $700,000.00
:Subtract depreciation = (-) $75,000.00
: Yields the Adjusted Cost Basis = $625,000.00
(2) Adjusted Selling Price of the Property :
: Selling Price = $700,000.00
: Subtract the expenses of sale = (-) $42,000.00
: Yields Adjusted Selling Price = $658,000.00
(3) Calculate the Captial Gain (or Loss)
: Adjusted selling price = $658,000.00
: Subtract adjusted cost basis = (-) $625,000.00
: Yields the Captial Gain (or loss) = (+) $33,000.00
In this example there was a captial gain of $33,000.00. Of course sometimes this may be a loss. Jusr plug in your figures and this will work every time. Like i said math is your friend :-) .
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