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. There are special considerations:

How to Calculate Gains

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 Your Home - This is the sale price, not the amount of money you actually contributed at closing.
2. Add Adjustments - The total of these is the adjusted cost basis of your home.
   
        * The cost to Purchase: Including transfer fees, attorney fees, inspections, but not the points you paid on your mortgage.
        * The Cost of the Sale: Including inspections, attorney's fee, real estate commission, and the money you spent to fix up your home    prior to its sale.
        * The cost of Improvements: Including room additions, deck, etc. Improvements do not include repairing or replacing something already there.

3. 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 for a single individual and up to $500,000 for a married couple on the sale of a home is exempt from taxation when 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 may also qualify for this exemption if you meet what the IRS calls unforeseen circumstances such as job loss, divorce, or family medical emergency.

Disclaimer: The contents of this page are for informational purposes only and do not replace the advice of your tax advisor. For more information contact your tax advisor.