What is capital gains tax?

Capital gains tax refers specifically to the tax imposed on the profit derived from selling an asset, such as real estate. When a property is sold for more than its original purchase price, the profit constitutes a capital gain, which is subject to taxation. This tax is typically calculated based on the difference between the selling price and the basis of the property (usually its purchase price plus any improvements made).

Understanding capital gains tax is crucial for real estate transactions because it directly affects the net profit an owner realizes when they sell property. Investors and homeowners alike need to be aware of this tax to accurately assess the financial implications of selling a property.

The other options describe different financial aspects related to real estate but do not define capital gains tax. For instance, a tax on the sale price of a property would usually relate to transfer taxes or sales taxes, not capital gains. Fees for property appraisal involve costs associated with determining the value of a property, while penalties for late mortgage payments are punitive measures relating to loan defaults, neither of which are relevant to the gains made from a sale.