I have lived in my home for 19 months, and we are selling for roughly $290,000. If I bought my home for $253,000, does that mean my capital gain is $37,000, even though I owe $230,000 on the loan? And do I get a partial exclusion on the amount?
Yes, your capital gain is about $37,000; the other $23,000 you’d receive (for a total of $60k) is considered return of capital.
You can add improvements to your home, as well as selling costs, etc. to your cost basis and decrease your capital gains.
Also, I should note that you’re just 5 months away from potentially being able to not owe any capital gains tax via the primary residence tax exclusion. This basically states that if you live in a home for two years and it’s your primary residence, then you can avoid paying capital gains on your first $250,000 of gains from the sale of your home.
If your gain is $37,000, then this could be a good potential tax savings.
Adam C. Harding, CFP
Disclosure: For informational purposes only. Not to be considered investment, tax, or legal advice. My responses on Nerdwallet are for educational purposes only and action should not be taken until a thorough analysis has been done by me or your financial advisor. Investing involves risk of loss and diversification does not ensure protection against risk of loss.
Thanks for your question, and Adam Harding is quite correct in his answer. If you can stretch out the sale date another 5 months you can avoid capital gains tax on the sale. Your capital gain on the sale is the difference between your sales price (minus commissions) and your adjusted basis. Your adjusted basis is your purchase price plus any improvements you’ve made to the house. You bought the house for $253K; add the cost of any improvements and you’ve got your adjusted basis. Improvements are different from repairs. Patch a leak in the roof and that’s a repair; replace your roof and that’s an improvement. Re-pour concrete and insert a new post along your fence plus add a few new slats and that’s a repair; change out the gate in your fence and put up a whole new side along your neighbor’s property line and that’s an improvement. Replace the water heater: improvement. Add up the cost of all the improvements you’ve made, add to the price you paid for your house back in 2015 and that’s your adjusted basis. Live in your house for at least 2 out of the most recent 5 years (months of occupancy do not have to be all consecutive, either) and you can waive up to $250K in cap gains for single owners and $500K of cap gains for married owners. Good luck
Sales Price minus purchase price minus costs of sale (escrow & commission) minus cost of any capital improvements = gain.
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