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:
- 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 may also qualify for
this exemption if you meet what the IRS calls "unforeseen circumstances"
such as job loss, divorce, or family medical emergency.
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