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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.
Also note that as of 2003, you also may
qualify for this exemption if you meet what the IRS calls
"unforeseen circumstances," such as job loss, divorce, or family
medical emergency.
Reprinted from REALTOR® Magazine Online by permission of
the NATIONAL ASSOCIATION OF REALTORS® Copyright 2005. All rights
reserved. www.REALTOR.org/realtormag
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