If you make a gain on the sale of a home, your profit may be subject to capital gains tax. This depends, in part, on whether the home was your primary residence. Your gain on a home sale is the amount you realized from the sale minus your investment--your adjusted basis--in the home. Any portion of your gain that is not excludable is subject to capital gains tax.

Calculating Your Realized Amount

The realized amount from your home sale is the selling price minus the expenses you incurred in the sale. The selling price is the total amount you received for your home, including all money and mortgages, notes, or debts assumed by the buyer as part of the sale. It also includes the fair market value (FMV) of any other property or services you received as part of the sale. The selling price does not include any personal property that was included in the sale but is not a permanent part of the home, such as furniture, appliances, or draperies.

The expenses you incurred in your home sale include:

• Commissions
• Advertising
• Legal fees
• Loan charges that you paid, such as points.

Calculating Your Basis

If you bought your home, your basis is usually the purchase price and certain settlement or closing costs. Your purchase price includes your down payment and notes or mortgages paid to the seller.

Settlement fees that add to your basis include:

• Abstract fees
• Charges for installing utilities
• Legal fees
• Recording fees
• Survey fees
• Transfer or stamp taxes
• Owner’s title insurance
• Any seller debts that you agree to pay, such as real estate taxes.

If you built your home, your basis is the cost of the land and construction, including:

• Labor and materials
• Contractor’s fees
• Architect’s fees
• Building permits
• Utility connections
• Legal fees.

Your basis does not include the value of your labor or any volunteer labor.

If you obtained your home as a gift, inheritance, from a spouse, or in a trade, your basis is either the FMV of the home when you got it or the previous owner’s adjusted basis.

Calculating Your Adjusted Basis

The adjusted basis of your home is the basis adjusted by changes that you made to its value.

Increases to your basis include:

• Additions or improvements with a useful life of more than one year that are part of the home sale
• Special assessments for local improvements
• Restoration costs following a casualty.

Decreases to your basis include:

• Gain postponed from the sale of a home before May 7, 1997
• Deductible casualty losses
• Insurance payments for casualty losses
• Payments for granting an easement or right-of-way
• Allowed or allowable depreciation for business or rental use of your home
• Various credits or payments you received for home improvements related to energy conservation or an adoption
• Sales tax on a houseboat or mobile home that you claimed as an itemized deduction.

Maximum Exclusion

Up to $250,000 of gain from the sale of your main home is excluded from capital gains tax, provided that in the five-year-period ending on the date of the sale:

• You owned the home for at least two years (ownership test).
• You lived in the home as your main residence for a total of at least two years (use test).
• In the two-year-period ending on the date of the sale, you did not exclude gain from the sale of another home.

Your main home is the one that you live in most of the time. There are exceptions to the five-year-rule for certain members of the U.S. Armed Forces, Foreign Service, and intelligence community.

If you are married, file a joint tax return, and meet certain other requirements, you may be able to exclude up to $500,000 of gain from the sale of your main home. If you own the home jointly with a person filing a separate tax return, you can exclude up to $250,000 of gain from the sale of your interest in the home.

Reduced Maximum Exclusion

If you do not meet the ownership or use tests or you excluded the gain on another home sold within the two-year-period, you may be able to claim a reduced exclusion on gain from the sale of your main home, provided that you sold your home because of:

• A change in your employment location
• Health reasons
• Unforeseen circumstances.

Additional Resources

• Internal Revenue Service:           http://www.irs.gov/faqs/faq10-1.html

• IRS Publication 523, Selling your Home:    http://www.irs.gov/publications/p523/index.html
• Capital Gains Calculator:            http://www.moneychimp.com/features/capgain.htm