Understanding Capital Gains in Real Estate
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 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: _______________________
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: _______________________
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:
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.
Moving to South Carolina - check out the SC Page on Taxes
Sue Lucas
Broker Associate
Re/Max Southern Shores
843-997-4595
Reprinted from
REALTOR® magazine (REALTOR.org/realtormag)
with permission of the NATIONAL ASSOCIATION OF REALTORS®.
Copyright 2008. All rights reserved
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