When you sell 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, but there are some special considerations.
In real estate, capital gains are based not on what you paid for the home, but on it’s adjusted cost basis. To calculate this:
- Take the original purchase price of your home (the sale price, not the amount of money you actually contributed at closing)
- ADD adjustments:
- Costs of the original purchase – including transfer fees, attorney fees, inspections (not points paid on your mortgage)
- Costs of the current sale – including inspections, attorney fees, real estate commissions and money spent to fix up the home right just prior to the sale
- Costs of improvements – including room additions, decorations, etc. (Note that the improvements do not include repairing or replacing something already there, such as putting on a new roof or installing a new furnace)
- The total of this is the adjusted cost basis of your home
- Now SUBTRACT this adjusted cost basis from the amount you are selling your home for. The difference is your capital gain.
Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of your home is exempt from taxation if you meet the following criteria:
- You have lived in the home as your principal residence for at least two out of the last five years.
- You have not sold or exchanged another home during the two years preceding the current sale.
Also note that as of 2003, you may also qualify for this exemption if you meet what the IRS calls “unforeseen circumstances” such as a job loss, divorce or family medical emergency.