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.
Reprinted
from REALTOR® Magazine (RealtorMag.Realtor.org)
with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright
2008. All rights reserved.