(1) Initial basis is usually the purchase price plus purchase expenses unless there was a prior Section 1031 exchange, rollover of gain from a prior residence or other acquisition through a tax-deferred transaction. In that event, the initial basis is reduced by the deferred gain from the prior transaction. If the property was recieved by gift, the initial basis is the donor's old basis at the time of the gift. If the property was received by reason of death, the initial basis is usually the fair market value on the date of the decedent's death.

(2) Capital improvements are costs that were capitalized, such as the cost of an additional rental unit, but do not include ordinary repairs and maintenance expenses that were previously deducted.

(3) Depreciation is the total deductions allowable for depreciating a building or other improvements (excluding the land) since the property was placed in service.

(4) Selling expenses are brokerage commissions, transfer tax, escrow fees, legal fees and similar transaction costs of the sale and do not include mortgages, prorations for tenant deposits, rent and taxes, and other items that may appear on a closing statement.

(5) The first portion of the gain reflects prior depreciation and is taxed at a 25% federal rate, not lower capital gains rates. The 25% rate applies to Section 1250 depreciation gain for individuals, such as prior depreciation taken on a building. The calculator allows you to insert a different rate if Section 1245 depreciation recapture applies to personal property or if you are a corporation.

(6) The remaining gain is taxed at a federal rate of 15% if the property is a captial asset and was held for more than one year by an individual. The calculator allows you to insert your federal tax rate if the property was not held for more than one year. The top federal rate on ordinary income is currently 35% for an individual. The calculator also allows a corporation to insert its effective tax rate since corporations do not have a preferential capital gains rate.

(7) The top state tax is 9.3% for individuals in California. The calculator allows you to insert your state tax rate.

Note: The calculator estimates the federal and state income tax on the gain in and of itself and does not take into account increases in taxes on other income due to the alternative minimum tax and the reduction of other tax benefits caused by a higher level of income.