Last time, in Part One of this series, we explored the basic principles of Capital Gains Tax and in Part Two we’ll dive a little deeper into the equation, and provide tips and strategies to help you minimize your tax.
Capital gains are calculated with the actual sales price you paid for your home, whether it was purchased five years ago, or fifty years ago. Of course, things like down payment, and mortgage interest are not included in cost basis calculations, but much of money you’ve invested over your five year, or fifty year period of ownership can be added to your original purchase price to create your “adjusted cost basis.”
To calculate that adjusted cost basis, you will need to figure out which property-related, out-of-pocket expenses that the government will allow you to add to your original purchase price. 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
This includes extensions and additions, such as a new patio or new landscaping. Repairs, replacements, and cosmetic additions do not count. The tax code gets a little complicated here, but generally speaking, 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, including broker’s commission, attorneys’ fees, and transfer taxes
Cost of Sale Repairs
For example, 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.
For more information on proper calculation of capital gains, GO HERE.
Considering selling your home? Karen would love to represent you and help you through the process. Contact her today, and you can get started by making informed decisions.
