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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:
Also note that as
of 2003, you may also qualify for this exemption if you meet
what the IRS calls "unforeseen circumstances" such as job loss,
divorce, or family medical emergency.
Reprinted
with permission from Real Estate Checklists and Systems,
www.realestatechecklists.com.
Reprinted
from Realtor(R)Magazine Online permission of the NATIONAL
ASSOCIATION OF REALTORS(R) Copyright 2005. All rights
reserved.
www.realtor.org/realtormag.
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