Capital Gains Tax

Investing in real estate presents numerous opportunities to grow wealth.  Investing is not just purchasing properties to hold and rent or rehab and flip, your primary residence should also be considered an investment.  it is also your primary residence. Owning real estate presents value besides having a roof over your head. The tax implications are one area where you realize value from ownership.

Anytime you sell an asset, the federal government is going to collect there portion.  Stocks are a common example of this, where the IRS will tax you on the difference between what you paid and what you made on the sale.  This tax is known as capital gains tax, and it applies to real estate sales as well. With housing, there is a relief clause that exists removing some tax burden.  If you area an unmarried home seller you would pay no capital gains tax on the first $250,000 made via a home sale, a married couple receives up to $500,000.

There are some rules, obviously, to this exemption.

  1. The property has to have been your primary residence for two of the last five years.

  2. You can only benefit from this exemption every two years.

The value in this capital gains tax exemption is that you can take the return you have seen from the home sale and use it as you see fit.

One other beneficial tax break is the ability to subtract your full cost basis in the property from the sales price.  What is the cost basis? The cost basis is the original purchase price, plus all the closing costs, selling costs, and improvements you made.  The greater this number the closer you may be to fully realizing the capital gains tax benefit, therefore putting more cash in your pocket. Use the spreadsheet below to see where you might stand.  A quick caveat with all this. To have a full and true understanding of any tax implication you should consult with a tax professional.

Your home’s original sales price when you bought it (not what you brought to closing).

Additional costs you paid toward the original purchase (include transfer fees, attorney fees, and inspections but not points you paid on your mortgage).


Cost of improvements you’ve made (include room additions, deck, etc. Improvements do not include repairing or replacing existing items).


Current selling costs (include inspections, attorney fees, real estate commission, and money you spent to fix up your home to prepare it for sale).


Add the above items to get your adjusted cost basis:


The final sale amount for your home.

The adjusted cost basis figure from above.

Your capital gain:


As you start to plug in numbers and consider how you can leverage this rule, keep in my mind the two caveats that exist.  This is not an advantage for someone who has several rental properties. But for those living in the residence of two of the last five years, you certainly can gain a tax advantage as an home owner.

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