Home sellers should find out amount of their income tax obligation on sale of their home in advance and not be surprised at tax time.
When you sell your home, you would owe income tax on the amount of your “capital gain”, which is determined by determining your “adjusted cost basis” – not based solely on what you paid for the home.
To calculate amount of “capital gains” on sale of your home, follow these steps:
1. Purchase price is the amount you paid for the home – and is not limited to amount of money you actually contributed at closing.
2. To calculate adjustments on price, 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” would be the total of your purchase price and adjustments – which is the “adjusted cost basis”.
4. Your “capital gain” amount is determined by subtracting the adjusted cost basis from the amount your home sells for.
Special exemption from income taxation on the sale of your home has been in place since 1997. Now up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from income 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.
This is for information only and is not the providing of professional tax advice or service. For more detailed information on income taxes when you sell your home, see IRS publication 523 at http://www.irs.gov/pub/irs-
By Harrison K. Long – Professional real estate representative and California real estate broker – Realtor at Coldwell Banker Previews, Orange County, CA – CA BRE 01410855
People ask us for information about Orange County CA homes and neighborhoods. While understanding the importance of real customer service, we listen for the wants and needs of our clients, pay attention and never take for granted the customer relationship.