Tuesday, July 03, 2007

Calculating Gain on a Home Sale

One reason real estate soared as an investment is the capital gains tax advantage it offers. With stocks or bonds, all long-term gains are now taxed at 15%. But when you sell your principal residence the first $250,000 of profit can be excluded from taxation for a single individual, or $500,000 can be excluded for married couples filing jointly.

To qualify you must have lived in the residence for 2 of the last 5 years, and those two years need not be consecutive. There is no requirement to purchase a replacement home in order to get this benefit.

To calculate your capital gain, start with your original purchase price and the costs associated with the purchase (such as recording, survey, title, and attorney fees). Add on to that the cost of any major improvements made to the home (that do not fall into the category of routine repairs). Deduct this total from your selling price and then deduct the expenses of sale, and the net result is your capital gain.

It's wise to seek the advice of a tax advisor if you have any questions on calculating gain on a home sale as there are some less obvious increases or decreases, as well as some exceptions to the requirements to qualify.