A Practical Guide for Real Estate Investors
For investment property owners, selling real estate, a top concern is often: How much tax will I owe—and is there any way to reduce it? The good news is that certain expenses can be used to offset capital gains, potentially reducing your capital gains tax liability.
Understanding which costs qualify, and how they’re applied, can potentially make a difference in your after-tax return. Below, we break down the most common categories of deductible and offsettable expenses related to investment real estate sales.
To calculate your capital gain, you subtract your adjusted cost basis from the net sale price of the property:
Capital Gain = Net Sale Price – Adjusted Basis
Your adjusted basis starts with the original purchase price and is adjusted for certain expenses:
The net sale price is what you sell the property for minus allowable selling expenses.
The following are a few common categories that can either reduce your taxable gain by increasing the adjusted basis or lower the gain by reducing net proceeds:
Substantial upgrades that add value to the property or extend its useful life—like remodeling a kitchen or building an addition—can be added to your basis. These reduce your taxable gain when you sell.
Note: Routine repairs and maintenance are not considered capital improvements.
Certain expenses reduce the net sale price, thus lowering the gain:
These reduce the “net proceeds” from the sale, reducing the taxable gain.
If not included in the basis, some original acquisition costs—like specific closing fees—may be added. Examples include:
If you claim depreciation on the property during ownership—as most investment property owners do—be aware that this amount is recaptured up to a 25% tax rate upon sale. You cannot offset recaptured depreciation with capital improvements, these improvements only increase your basis and may reduce overall capital gain—not the depreciation recapture.
When selling investment property, the following expenses do not reduce taxable gain:
Reducing capital gains tax starts long before a sale—it begins with accurate recordkeeping and thoughtful planning. Investment property owners who track eligible improvements and selling costs accurately may be able to reduce their taxable gain.
Before completing a sale, consult a tax advisor or real estate professional to review your property’s cost basis, depreciation history, and eligible offsets. A strategic approach can help you manage tax obligations and support long-term financial goals.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.