Capital Gains and Cost Basis for Real Estate when Selling Your Primary Residence.

I’ll describe for you some of the basic Tax implications when it comes to Selling Your Home.

Disclaimer: I am not a Financial Advisor, CPA or Tax Consultant. I do not guarantee the accuracy of any information being provided.

I do understand the complexities of trying to pay as little as legally required, when filing taxes for the Sale of Real Estate, which almost always includes Capital Gains.

  • Capital Gain. It’s the amount Gained in Value from the time you Buy an Asset to the time you Sell an Asset.
  • Cost Basis. Is the amount you paid to acquire and or improve the Asset.
  • Adjusted Basis. Purchase Price + Acquisition Costs + Improvement Costs.
  • The Goal. Raising Adjusted Basis, Lowers Capital Gains.

Here’s a simple example.

Purchase Price                   $500,000

Eligible Closing Costs      $10,000

New Roof                               $15,000

Remodel Kitchen               $25,000

Real Estate Lawyer Fees $12,000

Adjusted Basis                     $562,000

Sale Price           $875,000

Adjusted Basis $562,000

Capital Gains    $313,000 (Instead of $375,000)

 

Here’s the First Rule of Raising the Adjusted Basis.

  • BE ORGANIZED. KEEP ALL YOUR CLOSING DOCUMENTS AND RECIEPTS FOR IMPROVEMENTS UNTIL YOU SELL. THEN KEEP THEM FOR 7 YEARS AFTER YOU SELL.

Some Tax Code Rules

  • Be Organized, Consult with your Tax Advisor regarding these Rules, but you must provide them with documentation for him or her to review.
  • Some Closing Costs are NOT Eligible to be added to the Adjusted Basis.
  • Tax Exemption is the easiest form of Maximizing Profits. If you live in the Property for a minimum of 2 yrs or 2 of the last 5 yrs, $250,000 is exempt from Taxation. For a married couple $500,000 is exempt from Taxation. An exemption cannot be used if you’ve taken the Exemption in the last 2 years or if you are an Expatriate, meaning you gave up citizenship or residency status by living abroad for an extended period of time.
  • Repairs are not Improvements, but Major Repairs can be. Things like plumbing leaks, a Gardner, Light Bulbs, Patching the Roof, HOA Fees, are Not eligible for Raising the Adjusted Basis. Improvements or Major Repairs are the Key Factor in determining eligibility.
  • Land does not depreciate (in most cases), but the structure does. So, Tax filings through the years of ownership that include Depreciation will affect the amount of Capital Gains in your Tax Filing.
  • Inherited Property should be Appraised right away. There’s a Tax Code called the Step Up Basis or Double Step Up Basis for a married couple. If the property was originally purchased for $500,000 and at the time of death is worth $1M then the Cost Basis is Stepped Up to $1M, this means it can be sold Tax Free for $1M. If you wait to Sell and the Sale Price is $1.5M then $500,000 is Subject to Capital Gains. You must be able to prove the Value within 30 days of Death, get a Professional Appraisal.

Best way to Maximize Profits and Avoid Probate.

  • Create a Living Revokable Trust and Include the Property in the Trust with all the details of who, when and how the Inheritor (s) receives the Property. See my web pages on “Estate Planning” and “How to Hold Title”.