When liquidating a stock, you incur taxes on the profit, calculated as the variance between the purchase and sale prices. The parallel applies to selling a home or secondary residence, with additional nuances. Calculating Gain in Real Estate involves determining the adjusted cost basis, not the initial purchase price:
1. Start with the home’s purchase price, referring to the sale price, not the amount contributed at closing.
2. Add adjustments:
- Costs of the purchase (excluding mortgage points).
- Costs of sale (inspections, attorney’s fees, real estate commission).
- Any improvement costs excluding repairs/replacements.
3. Sum these for the adjusted cost basis.
4. Deduct this from the sale amount to find your capital gain.
A Special Real Estate Exemption for Capital Gains, effective since 1997, allows a tax exemption of up to $250,000 ($500,000 for couples) if:
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You’ve lived in the home as your principal residence for two of the last five years.
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You haven’t sold or exchanged another home in the two years preceding the sale.
Exemptions may apply under IRS-defined “unforeseen circumstances” like job loss or medical emergencies. Always verify with the latest tax information or consult a professional due to potential changes in tax laws.
