When you sell a property, you pay taxes on your gain. The gain is the difference between what you paid for the property and the amount you receive on a sale. If you make more than you paid, this is called a capital gains tax.
Capital gains will differ depending on your marital status. A single seller keeps the first $250,000 tax-free when he sells his primary residence; a married couple filing a joint return can walk away with up to $500,000 exemption. The key words here are "primary residence." Second homes, vacation homes, and investment properties don't qualify for the tax exemption.
If the market moves in your favor and you net a profit higher than the tax exemption limits, then you may need to pay capital gains taxthis often happens to people who have owned their homes for decades in areas with skyrocketing prices. But if you have made updates to your home that increased its value, then the IRS will help you. For example, if you add a deck, you can add the cost of this improvement to the price you paid for your home. The result is called your "cost basis," and this is the figure the IRS subtracts from the sales price to determine the loss or gain you make on a sale. Save your receipts, to show the tax authorities.
How to Calculate Your Capital Gain
Capital gains are calculated with the actual sales price you paid for the home, even if it was 40 years agonot the down payment or mortgage interest you've paid sinceplus the money you've spent on the house to date. Together, these expenses are called your "adjusted cost basis."
Property Related expenses generally, these fall into four categories:
Purchase costs: transfer fees, attorneys fees, home inspections, pest control inspections, recording fees, and title agency fees
Cost of improvements: includes extensions and additions, such as a new patio or new landscaping. Repairs, replacements. Cosmetic additions do not count. The tax code gets a little complicated here, but, if you upgrade something that was there before, such as a new kitchen or replacing the furnace, this is NOT an improvement cost, no matter how state-of-the-art your new installation is. The IRS publishes a handy chart in "Publication 523: Selling Your Home" to help you figure out which improvements qualify.
Cost of sale: any costs you incur in selling the property such as broker's commission, attorneys fees, and transfer taxes
Cost of sale repairs: Any cash you spend to fix up your home for the purpose of achieving a sale or to pass the buyer's home inspection
Add these expenses to the original price you paid for your home to calculate your adjusted cost basis. Deduct the amount from your sale price to get your taxable capital gain. It would be best to verify with a tax consultant or the IRS website before.
I do hope this has been informative, please do write to me at jr.homesold@gmail.com for any further questions. I'm a real estate specialist based in San Jose, California. Or contact me at Jayshree Reddy - 408-489-6812.
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I Live in San Jose. After a Long stint in Tech & Education moved to Real Estate in, Bay Area California.
I hope my expertise will come of help to you and you loved ones.
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