- Capital gains are taxes paid on the difference between what you paid for a home and what you sell it for, based on its “adjusted cost basis”. There are some special considerations, but first let’s look at how to calculate your capital gain.
- Purchase price
- Total adjustments equals
- Cost of purchase including transfer fees, attorney fees and inspections.
- Cost of sale including inspections, attorney fees, real estate commission.
- Cost of improvements including room additions, deck, security system, major remodel, etc. Improvements must have a “useful life” of more than a year.
- Your adjusted cost basis
- The sum of your purchase price and the adjustments.
- Your capital gain
- Subtract the adjusted cost basis from the amount you sell for to get your capital gain.
EXEMPTION FROM CAPITAL GAINS
Based on the Taxpayer Relief Act of 1997, if you are single, you will pay no capital gains tax on the first $250,000. If you are married, the exemption increases to the first $500,000. Certain eligibility rules apply, but the main ones are:
- You have owned the home for at least 24 months.
- The property was your primary residence for 2 of the previous 5 years. The 2 years of residence do not need to be concurrent.
- There are other rules, but they get confusing. If you don’t fall into the above, give us a call and we’ll check and see if you are exempt. See IRS Publication 523 for more details.
RENTAL PROPERTIES AND CAPITAL GAINS
If you sell a rental property and do not meet the residence eligibility rule, you may have to pay capital gains and pay back (or “recapture”) some or all of the depreciation you were entitled to take on your property. “Recapturing” depreciation means you must include it as ordinary income on your tax return. In order to defer capital gains and recapturing depreciation, you may opt to complete a “1031” Exchange. See our article on 1031 Exchange here.
This article is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, legal advice or instruction.
Pete has been a licensed real estate agent since 1998 and has represented buyers and sellers throughout San Diego County. Past clients include professional athletes, business owners, first time home buyers and sellers.
Purchasing his first condo (unassisted) at age 23, becoming a landlord at 25, buying and selling 21 of his own properties, including vacation properties and out of state rentals, Pete has the experience of both consumer and REALTOR®.
A Police Officer for over 31 years, Pete began and finished his distinguished career in Downtown San Diego. Witnessing the transformation of Downtown from burned out warehouses and vacant lots to the successful urban revitalization of today, Pete brings unmatched area knowledge to the San Diego market.
Pete and his wife, Anna, live and own in the East Village at The Legend Condos and have lived in various parts of the County. Knowing the challenges and rewards of living in a suburban house, an Alpine horse property and a Downtown condo, Pete offers professional guidance from a local’s perspective no matter where you reside.
Negotiation skills, problem solving abilities, attention to detail and an easy-going nature, Pete is the perfect fit for the discerning client who demands perfection.
Memberships:
Pete is a member in good standing with the National Association of REALTORS®, the California Association of REALTORS® and the San Diego Association of REALTORS®. All REALTORS® must subscribe to the NAR’s strict Code of Ethics, which is based on honesty, professionalism and the protection of the public.
Community involvement:
Pete gives back to the community by offering free dog training classes to his fellow Downtowners and volunteering at a local shelter. Pete has taught animal behavior seminars for the trainers at SeaWorld, The San Diego Zoo and Canine Companions for Independence. Pete has supervised the training for well over 100 Police Dog teams, along with dog handlers from the US Navy Seals.
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