Does a Small Check at Closing Mean a Small Tax Bill?

What you receive at closing is the sales price minus closing costs and the loan payoff. Your capital gain ignores the loan payoff. After cash-out refinances, you can get a small check and still owe Uncle Sam a large tax bill.

Key points

• Closing check = sales price minus closing costs minus loan payoff.
• Capital gain = sales price minus sales expenses minus adjusted tax basis.
• Adjusted basis = what you paid plus improvements minus depreciation.
• The loan payoff is not part of the capital gain math.
• Run our free calculator, then have your accountant check your numbers before you sell.

The fine print

• These are simplified formulas. Prorations, credits and other closing adjustments also change the size of your check.
• Basis goes down by the depreciation you were allowed to take, even if you never claimed it. Skipping depreciation on your return doesn't raise your basis.
• Your calculator result is a starting estimate. Have your accountant confirm your adjusted basis, gain and tax before you decide.

In this video

• 0:00 "I only got a small check"
• 0:29 What you get at closing
• 0:40 How capital gain is calculated
• 1:19 Why the loan payoff matters
• 1:43 Check your numbers before you sell
• 2:00 Our free capital gain calculator

Video transcript

"I just sold my property, and I only got a small check at closing, so I should have a really small tax bill." Well, that's not necessarily true. People often get confused about this because what we get at closing is based on one set of numbers, and what we owe for capital gains taxes is based on another set of numbers. So the amount that we get at closing is going to be whatever our sales price is minus the closing costs and minus the loan payoff.

But what we owe for capital gains taxes is calculated completely differently. So for capital gains taxes, instead, we're going to figure out what did we originally acquire the property for? What improvements have been made to the property? And then what depreciation have we taken on the property? And with that number, we know what the adjusted tax basis is. And then the difference between our sales price, minus our sales expenses and minus our adjusted tax basis is what forms our capital gain.

Well, those numbers for capital gain don't include the loan payoff. And that's why sometimes folks will close on an investment property, they'll get only a very small check because of cash-out refis that they've done, and then end up owing Uncle Sam a much bigger check than what they planned on. And so before you do any kind of sale of investment property, don't assume what your capital gains will be. Call your accountant. See what they say. Have them help you with the numbers.

Then, if you want a quick analysis of what your capital gain could look like, log on to wealthbuilder1031.com and look for our capital gain calculator. And with that free tool, you can plug in some very simple numbers and find out what your capital gain math would look like. So check your numbers. Check your numbers before closing.

Keep learning

• How capital gains are calculated
• Capital gains tax on real estate
• Capital gains tax calculator
• What is a 1031 exchange?

Have a question about your sale? Call 888-508-1901.

This video is for general educational purposes only and is not tax, legal or investment advice. Talk with your own advisors about your situation.