Real Estate Capital Gains Tax

What Are Capital Gains?

Capital gains refer to the profit you make when you sell a property for more than you paid for it. Similar to selling stocks, the gain is the difference between the purchase price and the sale price. However, real estate has unique considerations. For example, the original price includes the cost of certain improvements, so keeping receipts for renovations is essential.

How to Calculate Capital Gains on Real Estate

Capital gains in real estate are based on the adjusted cost basis of your property rather than the purchase price alone. Here's how to calculate it:

1. Start with the Purchase Price
   This is the total amount the property sold for, not just the cash you brought to the closing table.

2. Add the Following Costs:

   • Purchase Costs: Transfer fees, attorney fees, inspection fees, and other closing costs (excluding mortgage points).
   • Sales Costs: Real estate agent commissions, attorney fees, inspection fees, and any repairs or upgrades made specifically to sell the property.
   • Home Improvements: Major upgrades such as adding a deck, finishing a basement, or installing a new roof.

3. Calculate the Adjusted Cost Basis
   Add all these costs to your purchase price.

4. Subtract the Adjusted Cost Basis From the Sale Price
   The result is your capital gain.

Special Exemptions for Real Estate Capital Gains

Under current tax laws, you may qualify for an exemption that allows you to avoid paying taxes on a portion of your capital gains:

• Up to $250,000 for single filers
• Up to $500,000 for married couples filing jointly

Eligibility Criteria:
To qualify for the exemption, you must:

• Have owned the home for at least 2 years, and
• Used the property as your primary residence for at least 2 of the last 5 years.

Exceptions for Unforeseen Circumstances:
Even if you don’t meet the above criteria, you may still qualify for a partial exemption due to life events such as:

• Job loss
• Divorce
• Family medical emergencies

Receipts to Keep for Tax Purposes

The IRS allows you to include certain improvement costs in your adjusted cost basis. Examples include:

• Additions: Decks, porches, patios
• Heating and Cooling Systems: Ductwork, central humidifiers
• Landscaping: Fencing, sprinkler systems, swimming pools
• Plumbing: Water heaters, filtration systems
• Interior Updates: Kitchen remodels, flooring, wall-to-wall carpeting
• Miscellaneous: New roofs, security systems, satellite dishes

For a full list, refer to IRS Publication 523.

Understanding capital gains can save you money and ensure compliance with tax laws. The information provided here is for informational purposes only and should not be considered financial, tax, or legal advice. I am not a financial advisor, certified public accountant (CPA), or attorney. For personalized advice regarding your specific situation, please consult with a qualified financial advisor, tax professional, or legal expert.

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