Calculating Capital Gains

June 26, 2007



I've recently had some questions regarding capital gains. Present laws tax long term capital gains at 15%. However, the U.S. government encourages home ownership and has enacted laws which give a huge benefit to homeowners selling a principal residence. Individual sellers can exclude the first $250,000 in profit from being taxed; married couples filing jointly can exclude $500,000 in gain. This exclusionary benefit is presently available once every 2 years.



Here is a simplified formula for calculating the gain on your principal residence.



Property was purchased for $250,000 and was sold for $800,000. What a bonanza, but possible if the property was held over several years and sold in a rising market. During the course of ownership and perhaps some fix-it projects to sharpen up the house for sale, $17,500 was spent. $55,000 was spent in selling expenses (real estate commission, escrow, title, etc.).

Subtract the selling costs from the sale price: $800,000
- 55,000
_______
$745,000 adjusted sales price

Now add the cost of major improvements to the orignal purchase price:
$250,000
+ 17,500
_______
$267,500 adjusted cost basis
Subtract the adjusted cost basis from the adjusted selling price to determine the capital gain: $745,000
- 267,500
_______
$477,500

Rather than having to pay $477,500 x 15% ($71,625) in capital gains taxes, you are allowed to totally exclude your gain from taxation. If you had sold stocks with the same kind of gain, you would have paid the $71.625. Not only were you able to enjoy a wonderful home, you were able to keep your financial gain.