Your gain is calculated by taking your net proceeds from the sale and subtracting your adjusted basis.  What’s your adjusted basis?  Well, it’s your basis when you acquired the property, plus any improvements, less any depreciation or partial sales taken.  In other words, its what you bought the property for, plus improvements (that you can prove) minus anything you’ve taken away from the property.

Once you arrive at this figure you can calculate your taxable gain- if you’ve owned it for more than a year, you’ll be at the current long term capitol gain rate.  Otherwise it’s taxed as ordinary income.

 So smart sellers want to know how to avoid this tax… For your home, there’s an exemption that may apply.  For investment properties, you can’t avoid it, but you can defer it by way of a 1031 Tax Deferred Exchange.  In a 1031 you’re rolling your gain over into a new property, as opposed to putting it in your wallet.  This isn’t a casual transaction, and requires an intermediary and some planning.

Now for the disclaimer.  The US Government has a habit of changing the rules for this sort of stuff, so make sure you talk with your CPA or financial professional to make sure you’re using what’s available to your best advantage.