What is the capital gains tax in relation to real estate sales?

The capital gains tax is specifically a tax imposed on the profit made from selling an investment property. This tax applies when the property is sold for more than its purchase price, meaning it targets the financial gain realized from the transaction.

When a property owner sells an investment property, they may have lived there, rented it out, or held it for appreciation, among other scenarios. Regardless of the purpose of ownership, if they sell it for a higher price than what they originally paid, the profit (or gain) is subject to taxation.

Understanding this tax structure is crucial for real estate investors and homeowners alike, as it directly impacts net return on investment and financial planning related to property sales. In contrast, the other options do not accurately reflect how capital gains tax operates in real estate transactions.