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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:
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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.
Please consult and accountant foe any tax advice.
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