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.
