Understanding Capital Gains in Real
Estate
When you sell a stock, you owe taxes on your
gain—the difference between what you paid
for the stock and what you sold it for. The
same is true with selling a home (or a second
home), but there are some special considerations.
How to Calculate Gain
In real estate, capital gains are based not
on what you paid for the home, but on its adjusted
cost basis. To calculate this:
1. Take the purchase price of the home: This
is the sale price, not the amount of money you
actually contributed at closing.
2. Add adjustments:
Cost of the purchase—including transfer
fees, attorney fees, inspections, but not points
you paid on your mortgage.
Cost of sale—including inspections, attorney’s
fee, real estate commission, and money you spent
to fix up your home just prior to sale.
Cost of improvements—including room additions,
deck, etc. Note here that improvements do not
include repairing or replacing something already
there, such as putting on a new roof or buying
a new furnace.
3. The total of this is the adjusted cost basis
of your home.
4. Subtract this adjusted cost basis from the
amount you sell your home for. This is your
capital gain.
A Special Real Estate Exemption for
Capital Gains
Since 1997, up to $250,000 in capital gains
($500,000 for a married couple) on the sale
of a home is exempt from taxation if you meet
the following criteria:
You have lived in the home as your principal
residence for two out of the last five years.
You have not sold or exchanged another home
during the two years preceding the sale. Also
note that as of 2003, you also may qualify for
this exemption if you meet what the IRS calls
“unforeseen circumstances,” such
as job loss, divorce, or family medical emergency.
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