Capital Gain

Capital Gain is the profit made when the sale of an investment exceeds its purchase price, characterized by an increase in the value of a capital asset. A capital loss occurs when the purchase price of an investment exceeds the profits that are made by its sale. Capital gains are created through the sale of a capitalized asset. Since Capital Gains are a measurement of the net value received during the sale of an asset minus the basis for the asset at the time of sale, it is important to understand the net value of a sale and how an asset basis is determined. As it relates to real estate, net value received at the time of sale is determined by the cash and cash equivalents received minus all costs incurred to sell the property. The basis of a property is established at the time of sale with the purchase price and all costs paid by the buyer related to the transaction of acquiring the property. During the time the property is held, the basis may change through depreciation or any appropriate change in disposition. For example, a portion of land that is part of a property which was identified as a capital asset may have been subdivided and sold before the sale of that property. The division of land would have changed the basis of the property. Accumulated depreciation at the time of sale is also subtracted from the basis in order to calculate Capital Gains. An important consideration for investors is that Capital Gains may be treated differently than other income for the purpose of calculating tax liabilities. Based on the tax law at the time of sale, Capital Gains may create less tax liability for the seller than earned income.