Calculating and Reporting Your Home's Capital Gain When You Sell It
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Calculating and Reporting Your Home's Capital Gain When You Sell It
When you sell your home, you may gain money or lose money. If you have a gain, you can shelter some or all of it from taxes. If you have a loss, you cannot deduct that loss. But how to figure a gain or loss? It isn’t just a matter of subtracting the price you paid from the price you received when you sold. The price you paid must be revised by various factors in order to arrive at the cost basis, which is what you will subtract from the selling price.
The cost basis
Cost basis is:
By the way, some expenses that are not normally considered improvements, such as painting or maintenance, can legally pass as selling costs if they are part of your strategy for selling the home and are done within 90 days of the sale.
Things To Know
- To calculate a gain or loss, you must take various costs, improvements, and depreciation into account.
- Report gains on Schedule D of your tax return.
To calculate your gain or loss
Once you know the cost basis, subtract it from your selling price:
Selling price – Cost basis = Gain or loss
How much will be taxed?
If you have a gain, you must then calculate how much of it will be taxed. The formula is:
Gain – Whole or partial exclusion = Taxable gain
The purpose of these figures is to arrive at the true gain or loss on a home. Thus, buying a home for $200,000 and selling it ten years later for $350,000 does not mean that you gained $150,000 on it. Most likely, you gained less, and this can work in your favor by lessening the chance that the gain will exceed the amount you may keep tax-free.
Where to report a gain?
Report a gain you make on the sale of your home on Schedule D of your tax return. It is a short-term gain if you held the home for a year or less, and it is a long-term gain if you held it for more than a year.
IRS publication 523 discusses the cost basis and the buying and selling prices in more detail. It includes a fuller list of the costs touched upon in this article.