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Special Report
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 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, attorneys
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 REALTORSCopyright 2005.
All rights
reserved.
www.REALTOR.org/realtor
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