Capital Gains Exemption

What are Capital Gains?

Real Estate is considered a Capital Asset and when property owners sell real estate, they will be liable to the government for Capital Gains Taxes.  Although the calculations in determining a sellers Capital Gains Taxes can get very deep, lets just say the gain is the difference between the purchase price and the selling price.  If the property owner sells the property for more than they paid, the government considers that difference to be a gain, and taxes will be assessed on the gain.

To begin determining your Capital Gain, you must first start with your Basis.  The Basis will be the amount you purchased the property for.  As a property owner, you should always be looking to adjust you basis up when possible.  Two things can cause your Basis to go up.  Closing costs from purchasing the home can be used to adjust your Basis up as well as Capital Improvements can adjust your Basis up.  For example, if you paid $120,000 for your home and paid $3,000 in closing costs, then you would have an adjusted basis of $123,000.  Additionally, if you had $8,000 in capital improvements, now the adjusted basis would be $131,000.

Now that you know what your Adjusted Basis is, now you need to know the amount realized.  The amount realized will be the sells price, less all selling expenses.  If you sell your home for $155,000 and $12,000 in selling expenses, such as commission, etc., your amount realized will be $143,000.  Your capital gain will be the Adjusted Sales price less your amount realized.  In this example, the capital gain will be $12,000.

What are Capital Improvements?

Capital improvements are the cost of improvements to you home that will pro-long the life of the property, lasts for at least one year, add value to the property or adapt to other uses.  Capital improvements are important so they can be used to adjust your basis up.  More information can be found about this subject by visiting the IRS Publication 523.

Capital Gains Exemption

Many property owners are exempt from paying Capital Gains Taxes.  There are Capital Gains Exemptions for up to $250,000 for single tax payers or married and filing separately, in which case each spouse would qualify for the $250,000 each.  For married couples filing jointly, the exemption is $500,000.  To qualify for the exemption, one must have owned and lived in the home for at least two of the most recent five years.