A: That is not entirely correct. The current tax law states that an individual is exempt from the first $250,000 of Capital Gains ($500,000 for a couple) on a property that you have lived in for at least two of the past five years. If your gain is larger than $250,000, you will likely be taxed on the excess amount.
To figure out your gain, you must first know your cost basis. That is the amount you paid for the property plus any improvements you have made. The difference between your sale price (minus your expenses of selling) and your cost basis is your gain.
In your case, if you spent more than $250,000 on improvements, then you will probably be exempt from Capital Gains taxes.This tax break is a huge benefit for homeowners. Two bits of advice: 1- Always consult your accountant and your attorney before buying or selling real estate to understand all of the tax ramifications. 2 - Keep good records of all of your capital improvements in order to assist your accountant with the task of determining your basis when it’s time to sell.