The Internal Revenue code allows a homeowner to a specific amount of gain from a principal residence based on a taxpayer meeting certain requirements.
However, most homeowners don’t take advantage of all the adjustments in order to keep the gain as low as possible. If the truth could be told, most people’s records are so poor that when the that when the time comes to recognize the gain, the calculation probably have to be based on estimates instead of actual numbers.
Rules to be Eligible for Exclusion
Qualifying home must be used as your principal residence two out of the five preceding years. This exclusion does not apply to vacation or second homes.
Effective sales on or after May 7, 1997.
Couples filing joint returns can exclude up to $500,000 of gain on sale of principal residence. Single return filers can exclude up to $250,000.
Gain in excess of applicable exclusion is taxed at appropriate capital gains rate.
Basis of Residence
- Purchase Price -
The form starts out with the original purchase price of the home. This would be the price that is shown on the closing statement at the time of purchase.
- Personal Property Items -
The cost of personal property that was included in the purchase price must be subtracted at this point. If no actual value was assigned to the property at the time of purchase, a conservative estimate should be used.
- Purchase Costs -
Included here are the closing costs that the homeowners paid for the acquisition of the home but were not expensed in the year of purchase. Costs to acquire the loan and reserves for insurance cannot be deducted or capitalized.
- Total Basis at Time of Purchase-
- Capital Improvements-
IRS allows a homeowner to take the costs of capital improvements and add them to the basis of their home in order to accurately reflect the true gain in a property when it is sold. The problem is that many people find it hard to distinguish a capital improvement from a repair.
A repair is considered to be maintenance of an existing item such as fixing a dripping faucet, adding Freon to an air conditioner, or replacing a broken window.
However, a capital improvement is something that adds value to the residence either by materially adding features or extending the life expectancy of the improvement.
A good record should be kept of capital improvements and it needs to be documented with receipts and canceled checks. To avoid controversy at some point in the future, a photograph could go a long way in helping to prove that the improvement was actually made.
The basic questions to determine if an expenditure qualifies for capital improvement treatment are
(1) Does it materially add value to the property?
(2) Does it extend the life of a property?
(3) Does it adapt a portion of the home to a new use?
Capital improvements can include such items as landscaping, street assessments, remodeling, swimming pool, Formica counter-tops, and alike. If replacement items are used such as installing carpet where there had previously been carpet, only the upgrade amount can be added. For instance, if the home had a builder’s grade of carpet and it was replaced with a more expensive flooring, only the difference between the builder’s grade and the replacement can be added as a capital improvement.
An adjustment for casualty losses can also be made in this location on the form. A casualty loss is any actual monetary loss in value to the property you may have suffered, but did not recognize on your tax return for the year of the los and that you were not reimbursed for out of insurance proceeds.
- Adjusted Basis -
The combination of the total basis at the time of purchase and the total capital improvements is called the adjusted basis.
Qualifying home must be used as your principal residence two out of the five preceding years. This exclusion does not apply to vacation or second homes.
Effective sales on or after May 7, 1997.
Couples filing joint returns can exclude up to $500,000 of gain on sale of principal residence. Single return filers can exclude up to $250,000.
Gain in excess of applicable exclusion is taxed at appropriate capital gains rate.
- Purchase Price -
The form starts out with the original purchase price of the home. This would be the price that is shown on the closing statement at the time of purchase.
- Personal Property Items -
The cost of personal property that was included in the purchase price must be subtracted at this point. If no actual value was assigned to the property at the time of purchase, a conservative estimate should be used.
- Purchase Costs -
Included here are the closing costs that the homeowners paid for the acquisition of the home but were not expensed in the year of purchase. Costs to acquire the loan and reserves for insurance cannot be deducted or capitalized.
- Total Basis at Time of Purchase-
- Capital Improvements-
IRS allows a homeowner to take the costs of capital improvements and add them to the basis of their home in order to accurately reflect the true gain in a property when it is sold. The problem is that many people find it hard to distinguish a capital improvement from a repair.
A repair is considered to be maintenance of an existing item such as fixing a dripping faucet, adding Freon to an air conditioner, or replacing a broken window.
However, a capital improvement is something that adds value to the residence either by materially adding features or extending the life expectancy of the improvement.
A good record should be kept of capital improvements and it needs to be documented with receipts and canceled checks. To avoid controversy at some point in the future, a photograph could go a long way in helping to prove that the improvement was actually made.
The basic questions to determine if an expenditure qualifies for capital improvement treatment are
(1) Does it materially add value to the property?
(2) Does it extend the life of a property?
(3) Does it adapt a portion of the home to a new use?
Capital improvements can include such items as landscaping, street assessments, remodeling, swimming pool, Formica counter-tops, and alike. If replacement items are used such as installing carpet where there had previously been carpet, only the upgrade amount can be added. For instance, if the home had a builder’s grade of carpet and it was replaced with a more expensive flooring, only the difference between the builder’s grade and the replacement can be added as a capital improvement.
An adjustment for casualty losses can also be made in this location on the form. A casualty loss is any actual monetary loss in value to the property you may have suffered, but did not recognize on your tax return for the year of the los and that you were not reimbursed for out of insurance proceeds.
- Adjusted Basis -
The combination of the total basis at the time of purchase and the total capital improvements is called the adjusted basis.
This is the figure that is arrived at by subtracting the personal property items from the purchase price, then adding the unexpensed closing costs and then, subtracting the cumulative deferred gain.
If you want the full article and worksheet on taxes and computation of gain visit
The Internal Revenue code allows a homeowner to a specific amount of gain from a principal residence based on a taxpayer meeting certain requirements.
However, most homeowners don’t take advantage of all the adjustments in order to keep the gain as low as possible. If the truth could be told, most people’s records are so poor that when the that when the time comes to recognize the gain, the calculation probably have to be based on estimates instead of actual numbers.
Rules to be Eligible for Exclusion
Basis of Residence
This is the figure that is arrived at by subtracting the personal property items from the purchase price, then adding the unexpensed closing costs and then, subtracting the cumulative deferred gain.
If you want the full article and worksheet on taxes and computation of gain visit - http://www.brunorealty.com/pdf/Capital%20Gains%20Tax.pdf - all information prepared by the NAR
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