Calculating the capital gain on the sale of an investment property
Interest rates have been rising, so a lot of landlords are deciding to sell their properties. If you're one of them, you’ll need to deal with capital gains tax. This tax is based on the profit you make from selling the property, minus any exemptions or losses you can claim. If you lived in the property at some point, you might get some tax relief to cut down the amount you owe.
To calculate your capital gain (or loss), subtract the allowable costs from what you got for the property (or its market value when you sold it).
Sale Proceeds
Usually, your sale proceeds are just what you sold the property for. But if you gave it away or sold it for less to help someone out, you need to use its market value at the time of disposal. The same goes if you sold it to a family member or someone else you're connected to, even if they paid for it.
Allowable Costs
When figuring out your capital gain, you can deduct certain costs, like:
The purchase price
Any incidental purchase costs
The cost of any improvements
Any incidental costs of the sale
Purchase Price
Normally, this is what you paid for the property. But there are some exceptions. If you inherited the property, the "cost" is its market value at the date of death. If you got the property as a gift (except from a spouse or civil partner), the "cost" is the market value at the time you got it. For properties bought on or before March 31, 1982, use its value at that date if it's higher than the original cost. Note that inflationary gains since 1982 aren’t covered.
Incidental Purchase Costs
You can also deduct incidental acquisition costs when calculating the capital gain. This includes legal fees, surveyors' fees, stamp duty, and so on.
Improvement Costs
The cost of any improvements made to the property can be deducted too. This includes things like extensions or loft conversions. Just remember, there’s a difference between improvements (like upgraded windows) and maintenance (like fixing a few roof tiles or painting walls). Only improvement costs can be deducted.
Incidental Costs of Sale
Any costs related to selling the property, like estate agents’ fees and legal fees, can also be deducted when calculating the gain.