You will likely owe taxes on your capital gain, therefore it behooves you to know how it’s calculated.

Basically, your capital gain on the property is the difference between the adjusted tax basis and the sales price.

Calculating Capital Gain

Sales price (adjusted for costs of sale such as commission)  $400,000 Minus Adjusted tax basis 250.000 Equals Capital gain (on which tax is due) $150,000.

Thus, to go through our example, your basis is $250,000. When you sell, after taking off the costs of sale (in this case $400,000), you subtract the basis from the adjusted sales price and that’s your capital gain. The capital gains tax rate as of this writing is 15 percent for most taxpayers.

One of the problems many investors face is that they simply have no desire to reside in their rental property. So,they do a 1031 tax-deferred exchange,and obtain a property they would like to live in. Then
they reside in that property until the time limits have been reached and sell it as a personal residence, claiming the big exclusion. The problem here is that the government recently changed the rules. Now, if you previously did a 1031 tax-deferred exchange on the property, you must reside in it for the full five years before you get the exclusion. Apparently, so many investors were taking advantage of a combination 1031 exchange and exclusion that the government saw this as a tax loophole and moved to close it. While many investors are more than willing to reside in a home for two years in order to get the exclusion, far fewer are willing to do so for five years.