Understanding Capital Gains in Real Estate

Feb. 10, 2012 - PRLog -- 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.

Realtors are not tax experts, therefore contact a CPA for additional information about tax ramifications specific to your situation.

# # #

Program HR 3648 is a nationwide initiative whose mission is to:
1.Help homeowners receive the mortgage debt forgiveness this new law encourages.
2.Rescue as many homeowners from public foreclosure as possible.