Selling your home means packing up your stuff, leaving behind memories and, if you're selling at a gain, paying the Internal Revenue Service. When preparing to move, accounting for the capital gain on the sale of your old home can help you budget for your next one. As long as you've owned the home for over a year, any profits are taxed at the lower long-term capital gains rates.
The total cost of your home includes not only the price of the property itself, but also any fees you incurred in buying the home. In tax terms, this is called your adjusted basis. However, this does not include your financing costs. Your purchase price also increases by any substantial improvements you've made to the home while you owned it, but not normal wear and tear. For example, the cost of fixing a broken pipe doesn't count, but a septic system upgrade would.
Thankfully, Uncle Sam recognizes that selling a home costs money. Instead of using the sale price to figure your capital gain, you may use your proceeds, which equals the sales price minus your selling expenses, including your real estate agent's commission, advertising costs and legal fees. For example, if you sell your home for $600,000 but you spent $20,000 in fees, your sale proceeds total only $580,000.
Capital Gain Calculation
Your capital gain on your home sale equals your selling proceeds minus your adjusted basis. For example, if you have an adjusted basis of $280,000 and you sell your home for $580,000, you have a capital gain of $300,000.
If the home you're selling was your main residence, you might qualify to exclude up to $250,000 of the gain from your taxes. To qualify, you must have used the home as your main residence for two of the past five years and have owned it for two of the past five years. However, you can take advantage of this exclusion only once every two years. On the bright side, if you're married and both you and your spouse have lived in the home for two of the past five years and at least one of you has owned it for two of the past five years, you can exclude up to $500,000 of the gain if you file a joint return.
- House For Sale image by TMLP from Fotolia.com