Capital gains in real estate refer to the profit made from the sale of a property. The gain is calculated as the difference between the selling price and the property’s purchase price (plus any associated costs, such as improvements and fees). Depending on how long you’ve owned the property, capital gains can be taxed at different rates. Here’s a breakdown
- Short-term capital gains: If you sell a property within 1 year of purchasing it, any profit made is considered short-term capital gain. These gains are taxed at the same rate as ordinary income, which can range from 10% to 37%, depending on your income tax bracket.
- Long-term capital gains: If you sell a property after owning it for more than 1 year, the profit is considered long-term capital gain. Long-term capital gains are typically taxed at a lower rate than short-term gains. For individuals, this rate is often 0%, 15%, or 20%, depending on your total taxable income.
To calculate the capital gain, subtract the following from the selling price of the property:
- Purchase price: The amount you paid for the property, including associated costs like closing fees and commissions.
- Improvements and additional costs: Any money spent on improving the property (not maintenance) such as renovations, upgrades, or major repairs that increase the property’s value.
- Selling costs: Real estate agent fees, closing costs, and any other costs associated with selling the property.
Capital Gain = Selling Price – (Purchase Price + Improvements + Selling Costs)
Example:
Let’s say you purchase a plot of land for KES 5 million. You spend KES 1 million on improving the property and incur KES 100,000 in transaction costs (stamp duty, legal fees, etc.). You sell the land for KES 8 million.
- Capital Gain Calculation:
- Selling Price: KES 8 million
- Purchase Price: KES 5 million
- Improvement Costs: KES 1 million
- Transaction Costs: KES 100,000
Urban areas for example Westlands, Kilimani, Kileleshwa, Ruiru, Kitengela are being sought after by people who want to own homes for their families or for investments. Buying an off-plan property in Kilimani for a two bedroom would cost you approximately 7M to 10M KES, selling the apartment after completion will cost from 12.5to 17M or more depending on the location and market value.
Understanding capital gains in real estate is important for planning your sales strategy and minimizing tax liability. The key factors include the length of time you’ve owned the property, whether it’s your primary residence or an investment property, and any eligible tax exclusions or deferrals. Consulting with a tax professional or real estate advisor is often beneficial when making real estate transactions.
