Capital Gains in Real Estate

Taxes are ubiquitous and they greatly impact all investment decisions. In particular, the Capital Gain tax is an important consideration regarding the investment in real estate. The purchase of a home or property may very well be the largest investment decision a person will make in a lifetime. Having a basic understanding of the laws affecting property taxes and their impact is important. Taking the time to learn how to mitigate the negative impact of taxation on real estate investments is very likely to be financially rewarding.

A capital gain is the difference between what you paid for an investment and what you sold it for. However, it is not that simple when it comes to real estate. In real estate, capital gains are not based on just what you paid for the home, but on its adjusted cost basis. Here are the steps to take to find this cost basis:

1. Take the purchase price of the home; this is the sale price, not the amount of money you actually contributed at closing.


2. Add adjustments:


• Cost of the purchase - including transfer fees, attorney fees, inspections, but not points you paid on your mortgage.
• Cost of sale - including inspections, attorney's fee, real estate commission, and money you spent to fix up your home just prior to sale.
• Cost of improvements - including room additions, deck, etc. Note here that improvements do not include repairing or replacing something already there, such as putting on a new roof or buying a new furnace.
• The total of this is the adjusted cost basis of your home.
• Subtract this adjusted cost basis from the amount you sell your home for. This is your capital gain.
• What can you do to mitigate the impact of this tax on the sale of your home?


3. Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if you meet the following criteria:


• You have lived in the home as your principal residence for two out of the last five years.
• You have not sold or exchanged another home during the two years preceding the sale.

Also note that as of 2003, you also may qualify for this exemption if you meet what the IRS calls 'unforeseen circumstances," such as job loss, divorce, or family medical emergency.

Moving to the Texas Hill Country and especially Fredericksburg is a dream many share and many have realized this dream through careful and informed planning. Take a moment to look through some of the other information available in our FAQ list; it could be well worth it!