Understanding Capital Gains in Real Estate

When you sell a stock, you owe taxes on your gain, meaning on the difference between what you paid for the stock and what you sold it for.

The same holds true when selling a home (or a second home), but there are some special considerations.

In real estate, capital gains are based not on what you paid for the home, but on its “adjusted cost basis”.

To calculate the adjusted cost basis, follow these steps:

1. Purchase price: _______________________
The purchase price of the home is the sale price, not the amount of money you actually contributed at closing.

2. Total adjustments: _______________________

To calculate this, add the following:
• Costs you incurred to make the purchase aside from the cost of the home itself:  including transfer fees, attorney fees, and inspections, but not points you paid on your mortgage.
• Costs you incurred to sell the home :including pre-listing  inspections, attorney fees, real estate commission, and money you spent to fix up your home just prior to sale.
• Cost of improvements while you owned to home — including additions and major upgrades: Note here that some home repairs and replacements do not count for these purposes and you should consult a qualified accountant in determining what to include or exclude when calculating your cost basis.

3. Add 1) and 2) together to find your home’s adjusted cost basis: _______________________

4. Subtract the adjusted cost basis from the amount your home sells for to get your capital gain.

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.
• You meet what the IRS calls “unforeseen circumstances,” such as job loss, divorce, or family medical emergency.

For more details on the Capital Gain Exemption, please visit the IRS website or consult with your accountant or financial advisor!

Some post content courtesy of Realtor Mag