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: __________________________  

    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 sold 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 (REALTOR.org/realtormag) with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2008. All rights reserved.