Capital Gain

A capital gain is what you make when an asset sells for more than its adjusted cost basis. On a rental, it is the piece of the return that cap rate ignores: how much the value changes between purchase and sale, driven largely by NOI growth and the exit cap rate.

Value is NOI divided by cap rate, so a gain can come from either side. Raising NOI at a steady cap rate increases value; so does selling into a market where cap rates have fallen. The first is within the owner's control; the second is not.

In the US, a gain on property held longer than a year is taxed at long-term capital gains rates, and depreciation already taken is taxed on its own terms. A like-kind exchange can defer the tax by rolling the proceeds into another investment property.