Are Capital Gains Included in Adjusted Gross Income?

Investors who hold their assets for an extended period can benefit from the lower tax rates of a long-term capital gain, enhancing their after-tax returns.

The relationship between capital gains and Adjusted Gross Income (AGI) holds a key to unlocking financial success, but have you ever wondered how deep the connection between these two go?

In this article, we explore the relevance of capital gains for real estate investors. Capital gains, the profits earned from selling properties at higher prices than their cost basis, play a vital role in investment outcomes. We define capital gains in real estate, examine their tax implications, and differentiate between short-term and long-term gains. Additionally, we discuss the importance of cost basis, transaction costs, and property improvements in calculating capital gains.

What are Capital Gains?

Capital gains in real estate investments refer to the profit earned from selling a property at a higher price than its original cost basis. This profit is realized when the property is sold, and it is calculated by subtracting the purchase price from the sale price. Capital gains can be categorized as short-term or long-term, each with different tax implications. The cost basis, including transaction costs and improvements, is used in calculating capital gains.

Additionally, investors must consider depreciation recapture when selling a property that has previously claimed depreciation deductions. Understanding these concepts helps experienced investors make informed decisions to maximize their profits and optimize their tax liabilities.

Many investors choose to leverage their capital gains when they sell a property by reinvesting their proceeds into a new property via a 1031 exchange. That way, they can put their gains to work, deferring capital gains tax until the final sale of the investment. 

If you’re interested in learning more about leveraging your investment profits, get in touch with NNN Deal Finder’s 1031 Exchange specialists, and let us guide you through the process so you make great investments now and in the future. 

What is Adjusted Gross Income?

Adjusted Gross Income (AGI) is an individual’s or household’s tax liability. AGI is calculated by summing up all taxable income sources and then subtracting certain “above-the-line” deductions, which are deductions taken before itemizing or claiming the standard deduction. AGI determines a taxpayer’s eligibility for various tax deductions, credits, and exemptions.

The AGI figure helps in assessing an individual’s taxable income after accounting for specific deductions.

Are Capital Gains Included in Adjusted Gross Income (AGI)?

Yes, capital gains are considered part of AGI. When an individual or a household realizes a capital gain from the sale of a capital asset, such as selling a real estate property or stocks at a profit, that gain is added to their AGI. It is crucial to understand that capital gains are treated as taxable income, and they contribute to the taxpayer’s overall AGI.

The inclusion of capital gains in AGI can have implications for various tax benefits and deductions that are tied to income levels. For example, certain tax credits or deductions have income thresholds, and the presence of capital gains can push the taxpayer’s AGI higher, potentially reducing or phasing out these benefits. Additionally, the AGI level can also affect the tax rates applied to other types of income, such as wages and interest.

It’s important for taxpayers, especially real estate investors, to be aware of how capital gains impact their AGI and overall tax situation. Careful planning and tax strategies can help optimize tax outcomes and minimize the tax liability associated with capital gains and AGI.

Investors who receive capital gains distributions may consider itemized deductions to offset the tax impact, especially if short-term capital gains push them into higher tax brackets.

Income Types Included in AGI

Several types of income are included in AGI. Some common types of income included in AGI are:

Wages and Salaries: This includes the income earned from employment, as reported on Form W-2.

Self-Employment Income: Income earned from self-employment activities, reported on Schedule C or Schedule C-EZ.

Rental Income: Income generated from rental properties, reported on Schedule E.

Interest and Dividends: Income earned from bank accounts, stocks, bonds, and mutual funds, among others.

Capital Gains: Profit earned from selling capital assets, such as real estate properties, stocks, or bonds.

IRA and Retirement Distributions: Withdrawals from Individual Retirement Accounts (IRAs) and other retirement accounts.

Social Security Benefits: A portion of Social Security benefits may be included in AGI, depending on the taxpayer’s overall income level.

Unemployment Compensation: Payments received from state unemployment insurance.

How are Investment Profits Taxed?

When dealing with capital gains from real estate investments, it's essential to consider the potential implications of the net investment income tax.

Investors must consider capital gains tax when selling capital assets, including real estate properties, stocks, and bonds. This tax is levied on the profits earned from the sale.

Long-Term Capital Gains Tax Benefits

A benefit is the favorable tax treatment for long-term capital gains. Holding an asset for over a year before selling it may qualify you for lower long-term capital gains tax rates, which are typically more advantageous than ordinary income tax rates. This provides investors with a tax advantage for their long-term investments.

Offsetting Capital Gains Taxes with Capital Losses

Investors can strategically use capital losses to offset a capital gains tax. When you incur a loss from selling an asset, you can use it to offset gains from other assets in the same tax year. This can reduce your overall tax liability, potentially resulting in substantial savings.

Minimizing Taxes through Long-Term Capital Gains

By holding assets for an extended period, investors can benefit from the lower long-term capital gains tax rates. This approach enables you to pay less in taxes and retain more of your investment profits.

Consider 1031 Exchanges to Defer Capital Gains Taxes

For real estate investors, 1031 exchanges offer an opportunity to defer taxes. By reinvesting proceeds from the sale of one property into another like-kind property, you can postpone paying capital gains taxes, providing more capital for future investments.

Managing Capital Gains Taxes for Better Returns

By focusing on long-term capital gains and exploring tax-efficient strategies such as 1031 exchanges, investors can minimize their tax burden and optimize their returns. 


Real estate investors can strategically use capital losses to offset their gains and reduce the amount they ultimately pay in capital gains taxes.

Capital gains are considered part of AGI and can affect eligibility for various tax benefits and deductions tied to income levels. For example, real estate investors can strategically use capital losses to offset gains and reduce tax liabilities, maximizing after-tax profits. Moreover, long-term capital gains benefit from preferential tax rates, providing investors with a valuable tax advantage.

At NNN Deal Finder, our commitment lies in guiding investors towards tax-efficient real estate ventures. With our team of experts analyzing hundreds of NNN properties daily, we offer exclusive deals on a first-come, first-serve basis to our valued investors. Whether you are interested in 1031 Exchange properties or other NNN properties, we customize opportunities to suit your specific needs.

Take the next step towards unlocking tax-efficient real estate ventures. Partner with NNN Deal Finder today and let us guide you on a path to success in the world of real estate investments. Together, we can build a prosperous future through smart and strategic real estate investments.

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