Understanding Real Estate Capital Gains

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.”

This does NOT mean that you will pay tax because you may qualify for an exemption depending on how long you have lived in the property.  We can discuss this option as one of my clients.

 If you have an investment property then you could consider 1031 exchange and defer the tax bill.  

These are the strategies that I use with my clients to make sure that you a getting the most from your home sale.

Looking forward to doing business with you.

Thanks Frank Wade for the information.