Though it can sometimes seem difficult to calculate capital gains and losses, the definition itself is actually quite simple to understand. A capital gain or loss is defined as the difference between the buying price of an asset, and its eventual disposal price.
Of course, a number of other factors go into calculating a capital gain or loss, so it’s important to understand some common terminology:
Let’s say you originally purchased your property for $500,000, and it is then eventually sold for $650,000. This second number ($650,000), then becomes your proceeds of disposition amount.
This takes into account the original purchase price of your property, including any costs to acquire it (things like commissions, legal fees, etc).
If you received a property as a gift or through inheritance, the cost of the property is set at fair market value, which means the highest dollar value you could get for your property in an open and unrestricted market. Adjusted cost can also include capital expenditures, such as the cost of any additions or improvements you made to the property before disposal.
As an example, let’s say you purchased a property for $500,000, incurring $2,500 in legal fees in the process. The adjusted cost base on your new property would then be calculated as $502,500.
Let’s say before you sold your $500,000 property, you spent an additional $50,000 on a new deck and backyard, and also had to pay another $2,000 in legal fees. Your outlays and expenses would then be calculated at $52,000.