Capital Gains

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 calculat this:

  1. Take the purchase price of the home: This is thesale price, not the amount of money you actually contributed at closing.
  2. Add adjustments:
    1. Cost of the purchase--including transfer fees, attorney fes, inspections, but not points you paid on your mortgage.
    2. Cost of sale--including inspections, attorney's fee, real estate commission, and money you spent to fix up your home just prior to sale.
    3. Cost of improvement--including roomadditions, deck, etc. Note here that improvements do not include repairing or replacingsoething 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.

This is calculated for you by your Real Estate Professionals, and given to you in a government ready form.

A Special Real Estate Exempton for Capital Gains

Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of the 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, you may qualify for this exemption if you meet what the IRS calls "Unforeseen circumstances," such as job loss, divorce, or family medical emergency.

Contact your attorney or tax advisor for more information.

Information provided deemed reliable but not guaranteed.
Reprinted from the NATIONAL ASSOCIATION OF REALTORS 2003. www.realtor.org

 

 

 

 

The Home Selling Process:

FSBO vs. Listing with an Agent      
Selecting the Right Agent to List Your Home    
Preparing Your House for Market     
Open House Preparation Checklist    
Escrow for Sellers & Buyers    
Escrow Flowchart    
The Title Company's Role    
Lender Assistance to the Seller    
Disclosures in Real Property Transactions    
The Appraisal     
Inspection & Home Warranty     
Federal & State Withholding Regulations     
Capital Gains    
Closing Costs     
Moving Checklist     
Glossary of Terms