Understanding Your Tax Liability

When you sell your home, you may realize gain on the sale which may be taxable. To calculate your gain, use the following formula:

Amount Realized - Adjusted Basis = Capital Gain

The Amount Realized is the selling price of the home minus the selling expenses such as real estate commissions, documentary transfer taxes, escrow and title fees, points paid for the buyer, etc.

The Adjusted Basis is generally calculated by adding the purchase price of the home plus the purchase costs and the improvements costs. Purchase costs include recording fees, survey fees, documentary transfer taxes, charges for installing utility services. Purchase costs do not include hazard insurance premiums or other charges related to getting the mortgage loan such as the appraisal fee. Improvement costs include room additions or new deck but not costs to repair or replace an existing component of the home such as putting on a new roof or buying a new furnace.

Since 1997, up to $250,000 of gain on the sale of your principal residence (up to $500,000 if you are married and filing jointly) are exempt from taxation if you meet the following conditions:

• During the 5-year period ending on the date of the sale, you owned the property for at least 2 years. The 2-year period does not need to be continuous (the ownership test).
• During the 5-year period ending on the date of the sale, you lived in the property as your principal residence for at least 2 years. The 2-year period does not need to be continuous (the use test).
• During the 2-year period ending on the date of sale, you did not exclude gain from the sale of another principal residence.

If you do not meet the above conditions, you may still be able to claim a reduced exclusion if the sale of your main home was due to a change in place of employment, health or unforeseen circumstances.

For more information, refer to IRS Publication 523, Selling Your Home.

The information provided above is not intended as a substitute for advice from a qualified tax professional. We do not guarantee the accuracy, completeness or the applicability of this information to your circumstances and encourage you to contact a qualified tax professional for personalized advice and to rely solely on the advice of such professional on tax matters.