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.
