What do you want to calculate?
Enter acquisition details, depreciation, and sale assumptions to calculate adjusted cost basis, capital gains, depreciation recapture, and total tax owed.
Acquisition
Typical: 2-5% of purchase price
Only improvements that add value or extend useful life — not repairs
Depreciation
Property Type
IRS depreciates residential rental property over 27.5 years
Default: 20%. Check county assessor for actual land/improvement split
Sale Assumptions
15% federal + 3.8% NIIT = 18.8% for most investors
IRS taxes recaptured depreciation at 25% (Section 1250)
What Is Cost Basis for Investment Property?
Cost basis is the original value of an asset for tax purposes — typically the purchase price plus certain costs and adjustments. For investment real estate, the IRS requires you to calculate an adjusted cost basis before determining your capital gains tax when you sell. The adjusted basis accounts for your original purchase price, acquisition closing costs, capital improvements made during ownership, and accumulated depreciation deductions you have taken (or were allowed to take).
Understanding your cost basis is critical because it directly determines how much capital gains tax you owe when you sell. A higher adjusted basis means a smaller taxable gain. Many investors underestimate their basis by forgetting to include closing costs and capital improvements, which can lead to overpaying on taxes.
This calculator models the full capital gains picture: adjusted basis, net sale proceeds, depreciation recapture at 25%, long-term capital gains at your rate, and state taxes. It gives you a clear, itemized view of what you will owe before you list the property.
How to Use This Calculator
Choose your calculation mode
Standard calculates your adjusted basis and total tax. Break-Even finds the minimum sale price. Max Purchase reverse-solves for the most you should have paid.
Enter acquisition details
Purchase price, closing costs from the HUD-1 or closing disclosure, and total capital improvements over your hold period.
Set depreciation parameters
Years owned, property type (residential 27.5 yr or commercial 39 yr), and land value percentage. The calculator auto-computes depreciation or you can override with your actual figure from tax returns.
Enter sale assumptions
Expected sale price, selling costs percentage, capital gains tax rate, depreciation recapture rate (25%), and state tax rate.
Review your results
The results panel shows your adjusted cost basis, full tax breakdown with depreciation recapture and capital gains separated, net profit after tax, and a sensitivity table showing how tax changes at different sale prices.
Pro Tips for Accurate Results
- → Use your HUD-1 or closing disclosure for exact closing costs — do not estimate.
- → Capital improvements include new roofs, HVAC systems, additions, and renovations — not routine repairs like fixing a leaky faucet.
- → The IRS requires depreciation recapture even if you did not claim depreciation on your returns. Use the "allowed or allowable" depreciation amount.
- → Check your county assessor for the actual land/improvement split — the default 20% land may not match your property.
Inputs & Outputs — Field Reference
What each field means and where to find the numbers
| Field | What it means | Where to find it |
|---|---|---|
| Purchase Price | Original acquisition cost of the property, not including closing costs. | Purchase contract, HUD-1 |
| Closing Costs | Title insurance, escrow fees, attorney fees, transfer taxes, recording fees paid at purchase. These are added to your basis. | Closing disclosure (CD), HUD-1 |
| Capital Improvements | Expenditures that add value, extend useful life, or adapt property to new use. New roof, HVAC, kitchen remodel, additions. Not routine repairs. | Receipts, contractor invoices, Schedule E |
| Years Owned | Number of full years the property has been held. Used to calculate accumulated depreciation. | Purchase date on closing docs |
| Land Value % | Percentage of total purchase price attributed to land. Land cannot be depreciated. | County assessor, appraisal |
| Adjusted Basis (output) | Purchase price + closing costs + improvements − depreciation. This is subtracted from net sale proceeds to determine capital gains. | Calculated automatically |
| Total Tax Owed (output) | Sum of depreciation recapture tax (25%), long-term capital gains tax, and state tax. | Calculated automatically |
Cost Basis Formula & Calculation Method
The exact math this calculator uses — with a worked example
Step-by-step calculation
Calculate Initial Cost Basis
Purchase price + closing costs + capital improvements
$400,000 + $12,000 + $45,000 = $457,000Calculate Accumulated Depreciation
Depreciable basis = (purchase price + improvements) × (1 − land %). Then divide by useful life × years owned
($400K + $45K) × 80% ÷ 27.5 × 10 = $129,455Adjusted Cost Basis
Initial basis − accumulated depreciation
$457,000 − $129,455 = $327,545Net Sale Proceeds
Sale price − selling costs
$600,000 − $48,000 (8%) = $552,000Capital Gains & Tax
Split into depreciation recapture (25%) and long-term gain (your rate)
Gain = $552K − $327.5K = $224,455Recapture: $129,455 × 25% = $32,364LTCG: $95,000 × 18.8% = $17,860Total Tax = $50,224The Formulas
Reverse formulas (modes 2 & 3)
IRS "Allowed or Allowable" Rule
Even if you never claimed depreciation deductions on your tax returns, the IRS requires you to reduce your basis by the depreciation that was allowable. This means depreciation recapture applies regardless of whether you actually took the deductions. Always consult a CPA before selling.
Worked Example: Phoenix, AZ — Single-Family Rental
Purchased 2016, selling 2026, 10-year hold
Cost Basis Buildup
Sale & Tax
Important Note
This calculator provides estimates for educational purposes only. Tax law is complex and individual situations vary significantly. Capital gains rates depend on your filing status, total income, and holding period. State taxes, net investment income tax (NIIT), and depreciation recapture rules have specific thresholds and exceptions. Always consult a qualified CPA or tax attorney before making decisions about selling investment property. This tool does not constitute financial, tax, legal, or investment advice.
Understanding Adjusted Cost Basis
When you sell an investment property, the IRS does not simply tax you on the difference between what you paid and what you sold for. Instead, they use your adjusted cost basis — a number that starts with your purchase price and gets modified by additions (closing costs, improvements) and subtractions (depreciation). The adjusted basis is effectively the IRS's version of "what you have invested" in the property.
Items that increase your basis: Closing costs at purchase (title insurance, attorney fees, recording fees, transfer taxes), capital improvements (new roof, HVAC replacement, room additions, kitchen remodels), special assessments, and costs of defending title. Loan origination fees and points may also be added depending on the situation.
Items that decrease your basis: Depreciation deductions (or allowable depreciation, even if not claimed), casualty loss deductions, insurance reimbursements for casualty losses, and certain credits received. The most significant reduction for most investors is accumulated depreciation.
Maintaining accurate records of all basis adjustments throughout your ownership period is necessary. If you cannot substantiate your basis at sale time, the IRS may disallow certain adjustments, resulting in a higher taxable gain.
Depreciation Recapture Explained
Depreciation recapture is one of the most misunderstood tax concepts in real estate investing. When you sell a rental property, the IRS requires you to "recapture" the depreciation deductions you have taken (or were allowed to take) during your ownership. This recaptured amount is taxed at a maximum rate of 25% under Section 1250 — higher than the typical 15% long-term capital gains rate.
Here is how the gain is split: The total capital gain (net sale proceeds minus adjusted basis) is divided into two buckets. Bucket 1 is the depreciation recapture — equal to the lesser of total depreciation taken or total gain — taxed at 25%. Bucket 2 is the remaining long-term capital gain, taxed at your applicable rate (typically 15% + 3.8% NIIT = 18.8%).
The key insight many investors miss: depreciation recapture applies even if you never claimed the deductions. The IRS uses the "allowed or allowable" standard, meaning they will recapture the depreciation you were entitled to take, regardless of whether you actually did. This is why it is critical to claim depreciation on rental property — not claiming it does not avoid the recapture tax.
Example: $129,455 depreciation on 10-year hold
If you sell with a total gain of $224,455 and took $129,455 in depreciation, the recapture tax is $129,455 × 25% = $32,364. The remaining gain of $95,000 is taxed at your capital gains rate. Many sellers are surprised by this extra tax — plan for it before listing.
1031 Exchanges: Deferring Capital Gains Tax
A 1031 exchange (named after Section 1031 of the Internal Revenue Code) allows you to defer both capital gains tax and depreciation recapture tax by reinvesting the sale proceeds into a "like-kind" replacement property. This is one of the most effective tax strategies available to real estate investors and can be used repeatedly, potentially deferring taxes indefinitely.
Key requirements: The replacement property must be of "like-kind" (any real property for any real property in most cases), you must identify replacement properties within 45 days of closing, and you must close on the replacement within 180 days. All proceeds must go through a Qualified Intermediary (QI) — you cannot touch the funds directly. Your basis in the new property carries over from the old one.
When to consider a 1031 exchange: If your effective tax rate on the sale is above 18-20% (which this calculator will show you), a 1031 exchange can save significant money. Look at the "Total Tax Owed" line in your results — that is the amount you can potentially defer through a 1031 exchange.
Important limitations: You cannot 1031 exchange into your primary residence (there is a minimum 2-year waiting period before converting), the replacement property value must be equal to or greater than the relinquished property, and you cannot receive any "boot" (cash or non-like-kind property) without triggering partial tax. The exchange must be completed with a QI — attempting a direct swap or holding funds yourself will disqualify the exchange.
Capital Improvements vs. Repairs: What Counts?
The distinction between capital improvements and repairs is critical for calculating cost basis. Capital improvements are added to your cost basis and reduce your taxable gain when you sell. Repairs are deducted as current expenses on Schedule E and do not affect your basis.
Capital Improvements (add to basis)
- • New roof or complete roof replacement
- • HVAC system replacement
- • Room addition or structural changes
- • Kitchen or bathroom remodel
- • New plumbing or electrical systems
- • New driveway, deck, or fencing
- • Energy-efficient upgrades (solar panels)
- • Landscaping (permanent, structural)
Repairs (current expense, not in basis)
- • Fixing a leaky faucet or toilet
- • Patching holes in drywall
- • Repainting (same quality)
- • Fixing broken windows
- • Unclogging drains
- • Replacing light fixtures (like for like)
- • Minor appliance repairs
- • Pest control treatments
The IRS uses a three-part test: Does the expenditure (1) add value to the property beyond its original condition, (2) extend the useful life of the property, or (3) adapt the property to a new or different use? If the answer to any of these is yes, it is likely a capital improvement. When in doubt, err on the side of classifying as an improvement — it increases your basis and reduces your taxable gain.