What does the term "capital gains tax" refer to in property sales?

The term "capital gains tax" refers to the tax imposed on the profits derived from the sale of an asset, such as real estate, when the sale price exceeds the purchase price. This means that if a property is sold for more than what it was originally bought for, the seller is required to pay a tax on the profit, which is calculated as the difference between the sale price and the initial purchase price.

Understanding that capital gains tax is specifically concerned with the profit aspect helps to clarify what types of transactions it applies to. In real estate, it typically integrates both long-term and short-term capital gains based on how long the property has been held before the sale. People selling properties may qualify for exemptions under certain conditions, like the primary home exclusion, but the basic principle remains that it is the profit from the sale that is taxed.