The capital gain on the disposition of an asset is calculated by subtracting the cost basis of the asset from the proceeds received from the sale. For example, if you purchase a stock for $50 then sell it later for $120, the capital gain on the sale would be $70 ($120-$50). If you are selling an asset that you have claimed depreciation expense for tax purposes, such as a condo that you rented out, you would reduce the cost basis by the depreciation expense and increase the cost basis for improvements you have made to the property while you owned it. Example: you purchased a condo for $100,000 and rented it out for 5 years. Each year, you claimed depreciation expense of $3,600 for a total depreciation expense claimed of $18,000. Before you sell the property, you make improvements to the kitchen totaling $4,000. Your cost basis in the property is $100,000-$18,000 + $4,000 = $86,000. If you sell the condo for $125,000, your capital gain is $39,000 ($125,000 - $86,000).