Real Estate Capital Gains Tax Calculator: The Investor’s Guide

As a real estate investor, you may want to look into using a real estate capital gains tax calculator in certain states.

When selling your real estate investment property, the profit you make from that sale could be charged a capital gains tax. This will take away from your overall return on investment. While not all states charge capital gains, it is important to know when capital gains tax is applicable and how to possibly minimize it. Keep reading to learn more about capital gains tax in real estate and why a real estate capital gains tax calculator may be useful to you as an investor. 

What Are Capital Gains?

Before getting into how to calculate your property’s capital gains tax rate, it is important to know what exactly capital gains are and why they are taxed in certain states. When selling a major asset like property, the difference between the original price and the selling price is referred to as your capital gains. This capital gain is considered income by most states and is therefore taxable at varying rates. To determine the tax rate when selling your property, you will also need to know which bracket of capital gains tax you fall under to get an accurate estimate.

Short Term Capital Gains Tax

When it comes to major assets like real estate, your capital gains tax bracket is determined by time rather than your actual income or profit. As an investor, if you are into the fix and flip real estate strategy or any similar strategy, then chances are you will be charged for short term capital gains tax. 

When holding any asset for less than a year, any income or profit gained will be charged at a normal income tax rate. Take the fix and flip real estate strategy, for example. Short term capital gain tax rates for a property sold at $200,000 held for under a year would be 32%. However, if you earned $50,000 from your day job, your income tax bracket now falls under $250,000. This means you will be charged at a higher tax bracket of 35%. 

Since you held the property for less than a year, the calculations for your capital gains tax are much higher. If capital gains taxes are not properly accounted for, these charges could easily ruin your investment returns. If you are unsure about which tax bracket you would fall into, using a real estate capital gains tax calculator that takes into account the length of ownership is a good place to start. 

Long Term Capital Gains Tax

If you’ve heard that tax rates on properties and investments are cheaper than regular income tax, they are likely referring to long-term capital gains tax. Unlike short-term capital gains tax, long-term capital gains tax will only take 20% of your total profits from the sale. However, you will have to have legal ownership of the property for at least one year to fall under this category. 

To avoid the high rates of short-term capital gains taxes, many investors have adopted the buy and hold real estate strategy. As opposed to the fix and flip real estate strategy, investors buy an investment property with the intention of owning it for at least a couple of years. Depending on the state and how long you hold the property, you might be able to avoid capital gains taxes altogether.  As a general rule of thumb, capital gains taxes will not be changed for the following if you own the property for two to five years or more:

• Single Taxpayer: First $250,000 is non-taxable when sold
• Joint/Married Taxpayer: First $500,000 is non-taxable when sold
  

Note: Any amount past these two categories can be taxed up to 20% depending on state rules.

Two to five years may seem like a long time to wait for your return on investment just to avoid higher taxes. However, during this time, your property can still generate profit through rental income. Smart investors who choose to hold their property before reselling will list it as a traditional rental or as an Airbnb rental. Renting for a couple of years will cover most, if not all, of the costs of maintaining the property like mortgage, insurance, and repairs. To calculate your potential rental income, sign up for Mashvisor’s 7-day free trial and access our rental property calculator.

Though it may take a few years, with the value of your property increasing and possibly getting some extra income, the buy and hold strategy has many benefits that you should consider. From an investor’s standpoint, there are many reasons why you shouldn’t sell right away this year, and capital gains tax just so happens to be one of them. 

Which States Tax Capital Gains?

Practically all states in the United States have some form of capital gains tax. They also have varying rates and taxables depending on each state. The only states without capital gains taxes are as follows: 

• Alaska
• Florida
• New Hampshire
• Nevada
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

According to the World Population Review, California has the highest capital gains tax at 13.30% which is closely followed by Hawaii with an 11.00% capital gains tax rate. While it is quite easy to search the general capital gains tax of each state, it is advisable to use a real estate capital gains tax calculator for ease and accuracy. Any good tax calculator for capital gains will consider factors like the length of ownership, value, filing status, and location to give you the best estimates.

Most of the real estate capital gains tax calculators available online have their own databases that include the tax rate of each state. All you have to do is pick one that you trust has the most updated and current information to ensure that the estimates are accurate for that year. 

How Does a Real Estate Capital Gains Tax Calculator Work?

If you have used any type of investment property calculator previously, then using a capital gains taxes calculator should be quite easy for you. Capital gains are calculated by the general formula:

Sale Price – (transfer fees + inflation + house improvement cost) = Capital Gains

When using a real estate capital gains tax calculator, you will have to input a few things like:

• Original price
• Sale price
• Duration of ownership
• Tax filing status
• Annual income
• Property location

This will help the real estate capital gains tax calculator come up with the most accurate estimate. It will also give you a clearer idea of what your investment bottom line will actually be. Once you’ve input all the information, most calculators will give you a breakdown of their computations. 

How Can I Find Lucrative Real Estate Investments?

With a capital gains calculator to help you on your investment journey, the next step is to find a lucrative real estate investment. There are multiple ways to find a lucrative property.  If you are looking at how to invest in real estate and find a lucrative deal, Mashvisor is an essential resource and tool for any investor. Mashvisor is a real estate data analytics company that offers various investment tools to help novice and seasoned real estate investors make informed decisions. Here are just some of the main features Mashvisor’s real estate investment tools offer to ensure that you find a lucrative investment:

1. Finding the Right Location With Mashvisor’s Heat Map

While there are multiple listings available online, Mashvisor’s heatmap makes filtering through options a breeze. Mashvisor’s heatmap will show you which neighborhoods in the city are the most lucrative. Color-coding each area, you will be able to instantly see which areas to further look into and which ones to avoid. Depending on your real estate strategy and rental scheme, Mashvisor can also show you which areas are better suited for traditional or short-term rentals like Airbnb.

2. Metric Breakdown of Potential Investment

Once you’ve narrowed down the location and possible properties you want to potentially invest in, Mashvisor can give you a breakdown of its potential costs and returns in a matter of minutes. From mortgage costs to potential Airbnb income, these are just some of the metrics you will be able to access on Mashvisor:

Costs Breakdown: 

• Taxes
• HOA dues
• Repairs
• Loan and mortgage payments
• Monthly expenses

Income Breakdown:

• Cash flow
• Cash on cash returns
• Cap rate
• Traditional and Airbnb income 
• Occupancy rate

3. Comps and Real Estate Analysis

In addition to the metrics of each potential property, Mashvisor can also provide you with a full real estate analysis and comparison of potential investments. Whichever property you are considering, Mashvisor gives you a projection of its possible performance in the real estate market based on similar properties in the area. These projections include metrics like occupancy rates, cash on cash returns, average rental income, median sale price, etc. With this, you will be able to get a better sense of the potential real-life performance of your investment property on the market. 

Best Places to Buy Investment Properties This 2022

Before you can compare properties and calculate your possible rental income or capital gains taxes, the first thing you need to do is buy a property. To avoid high capital gains taxes, you may want to consider buying a property with the intention of holding it. You could ensure that you do not lose any money from maintaining the property during this time by buying a property with a high rental income to cover the maintenance costs. Using Mashvisors’ database based on traditional and Airbnb potential rental income, these are the best places to buy investment properties this 2022:

1. Cave Creek, Arizona

• Median Property Price: $1,138,461
• Average Price per Square Foot: $399
• Monthly Traditional Rental Income: $4,127
• Traditional Cash on Cash Return: 3.41%
• Price to Rent Ratio: 23
• Monthly Airbnb Rental Income: $5,328
• Airbnb Cash on Cash Return: 3.55%
• Airbnb Daily Rate: $382
• Airbnb Occupancy Rate: 65%

2. Agoura Hills, California

• Median Property Price: $1,396,505
• Average Price per Square Foot: $593
• Monthly Traditional Rental Income: $4,500
• Traditional Cash on Cash Return: 2.34%
• Price to Rent Ratio: 26
• Monthly Airbnb Rental Income: $6,753
• Airbnb Cash on Cash Return: 3.79%
• Airbnb Daily Rate: $579
• Airbnb Occupancy Rate: 61%

3. Holderness, New Hampshire 

• Median Property Price: $1,232,990
• Average Price per Square Foot: $547
• Monthly Traditional Rental Income: $3,229
• Traditional Cash on Cash Return: 1.84%
• Price to Rent Ratio: 32
• Monthly Airbnb Rental Income: $7,118
• Airbnb Cash on Cash Return: 4.61%
• Airbnb Daily Rate: $389
• Airbnb Occupancy Rate: 60%

4. Sugarloaf Key, Florida

• Median Property Price: $1,199,167
• Average Price per Square Foot: $814
• Monthly Traditional Rental Income: $5,033
• Traditional Cash on Cash Return: 2.03%
• Price to Rent Ratio: 20
• Monthly Airbnb Rental Income: $5,900
• Airbnb Cash on Cash Return: 3.28%
• Airbnb Daily Rate: $893
• Airbnb Occupancy Rate: 53%

5. Watchung, New Jersey

• Median Property Price: $719,983
• Average Price per Square Foot: $339
• Monthly Traditional Rental Income: $6,178
• Traditional Cash on Cash Return: 6.24%
• Price to Rent Ratio: 10
• Monthly Airbnb Rental Income: $5,393
• Airbnb Cash on Cash Return: 3.41%
• Airbnb Daily Rate: $255
• Airbnb Occupancy Rate: 51%

6. Roslyn, New York

• Median Property Price: $1,437,067
• Average Price per Square Foot: $532
• Monthly Traditional Rental Income: $9,185
• Traditional Cash on Cash Return: 4.00%
• Price to Rent Ratio: 13
• Monthly Airbnb Rental Income: $5,093
• Airbnb Cash on Cash Return: 0.18%
• Airbnb Daily Rate: $714
• Airbnb Occupancy Rate: 41%

7. Claverack, New York

• Median Property Price: $853,050
• Average Price per Square Foot: $412
• Monthly Traditional Rental Income: $4,049
• Traditional Cash on Cash Return: 3.39%
• Price to Rent Ratio: 18
• Monthly Airbnb Rental Income: $6,224
• Airbnb Cash on Cash Return: 4.60%
• Airbnb Daily Rate: $368
• Airbnb Occupancy Rate: 59%

The Bottom Line

As a real estate investor, before you sell your property, it is important to consider how capital gains tax will affect your bottom line. While many would like to see their return on investment sooner than later, postponing the sale of your property may actually work in your favor. In the US, capital gains tax rates decline when you have owned the property for more than a year. To ensure that your tax calculations are accurate, consider using a real estate capital gains tax calculator. No matter what state or which type of capital gains tax you will have, a capital gains calculator can give you reliable computations in minutes. 

During the in-between phase of buying and selling, investors can rent out their property to cover expenses and generate some income for the time being. To ensure that your investment property is lucrative in both the rental and sale markets, try using Mashvisor’s investment tools. From helping you narrow down a location to giving your property comparisons, Mashvisor can easily help you determine the potential of any property across the state.  Sign up for a 7-day free trial of Mashvisor.