Chapter 18 Section 2

A capital gain is the profit realized from the sale of a real estate asset. It is the difference between the "adjusted basis" of the property (what the investor has into it) and the "net selling price" (what they sold it for, minus closing costs). If the property sells for more than its adjusted basis, the investor has a capital gain, which is typically taxed at a favorable rate compared to ordinary income. If it sells for less, they incur a capital loss, which can sometimes be used to offset other gains for tax purposes.The "basis" is essentially the investor's financial starting point in the property. The "initial basis" is simply the original cost of acquiring the asset, including the purchase price and closing costs. Over time, this number changes to become the "adjusted basis." It increases when the investor makes capital improvements (like adding a new roof or an HVAC system) and decreases when the investor claims tax depreciation deductions. The adjusted basis is the critical number used to calculate exactly how much profit (capital gain) was made upon sale.