Calculate the Capital Gain on a Second Home

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How do you calculate the captial gain on a second home? Is it the amount you received at closing, or some other formula?

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Capital gain is not the amount you receive at closing for the sale of a home. Simply put, and specific tax situations are rarely simple, capital gain is the difference in the amount realized from the sale of the home less the adjusted basis of the home. On the other hand, the amount you receive at closing is the sales price less the closing costs less the amount owed on the home. Capital gain has nothing to do with how much is owed on the home.

So to compute capital gain you need to know the amount realized on the sale and the adjusted basis of the asset sold. The amount realized is the selling price less the selling expenses. So if a home was sold for $200,000 and the selling expenses were $15,000, the amount realized was $185,000. The basis in the home is usually, but not always, what the home cost.

For example what if the home was inherited? In that case the fair market value is used as the basis. But for simplicity’s sake let’s say that in this example the home was purchased 10 years ago for $150,000. Now the basis is adjusted up or down depending on specific situations. One item that affects the basis are improvements to the home. Let’s say in our example that a room was added to the home at a cost of $12,000 and another required adjustment reduced the basis by $2,000. If that were all the adjustments to the basis, the adjusted basis would be $160,000; the total of the $150,000 basis and the $10,000 of adjustments. So if the amount realized on the sale of the home in this example was $185,000 and the adjusted basis was $160,000, the capital gain would be $25,000.

To show why the amount received at closing is not the capital gain, let’s say in this example that the home was free and clear. The seller would receive $200,000 less the closing costs when the home was sold, but the capital gain is still $25,000. If instead the seller owed $195,000 on the property they would probably have to bring money to closing, but the capital gain would still be $25,000.

The amount of tax owed on the capital gain on the sale of a home depends on how long the home was owned and whether any of the gain can be excluded due to its use as a main home. Here is a link to an IRS publication that goes into more detail on computing capital gain on the sale of a home. Computing capital gain and the tax owed on capital gain is certainly an area that may require professional tax advice.

http://www.irs.gov/publications/p523/ar02.html#d0e615

Answered over 8 years ago
Harlan Cooper
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