What does capital gains tax apply to in property transactions?

Capital gains tax is a tax on the profit made from selling an asset, in this case, a property. When a property is sold for more than its original purchase price, the profit—or capital gain—is subject to taxation. This means that the difference between the sale price and the purchase price, adjusted for any improvements made to the property over the years, determines the amount of capital gains tax owed.

Understanding this concept is vital for property owners, as it affects the financial outcome of selling real estate. The other options do not accurately represent what capital gains tax applies to; for instance, the purchasing price relates to the initial investment rather than the profit made. Similarly, rental income is taxed separately as ordinary income, while maintenance costs are considered expenses and do not factor into capital gains.