• 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 holds true when 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, 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:
      • Cost of the purchase, including transfer fees, attorney fees, and inspections, but not points you paid on your mortgage.
      • Cost of sale, including inspections, attorney fees, 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. Your home's adjusted cost basis: _______________________

      The total of your purchase price and adjustments is the adjusted cost basis of your home.
    4. Your capital gain: _______________________

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