Calculating capital gains on a home sale


September 19, 2004|By Tom Hamilton | Tom Hamilton,KNIGHT RIDDER/TRIBUNE

A reader asks: "If I were to buy a house for $150,000, put $15,000 of upgrades into it and then sell it two months from the purchase date for $200,000, would there be a capital gains tax on the profit?"

Dear Reader:

In the broadest of senses, I will answer your question. There are other means to limit your tax liability, but we won't be going there.

So, using your example and assuming you claimed no depreciation during your two months of ownership, this is what you would expect for taxable gains. Your original purchase price of $150,000 is your original basis in the property. This is equivalent to the original cost new or initial book value of the property.

However, you made capital improvements to the property in the amount of $15,000 during your ownership that increased the usefulness of the property. This is added to the original basis in the property, and the result is the property's "adjusted basis."

If you had depreciation deductions, those would be subtracted and would contribute to a lower value of the "adjusted basis."

Regardless, in this example the net effect is an adjusted basis in the property of $165,000. That is what you have invested in this property.

When you sell the property for $200,000, you are selling the property for more than its "book value" (which we called the adjusted basis). That is a true capital gain because you are selling an asset for more than you paid for it. Further, since you sold it within a year, it is subject to short-term capital gains taxes.

Tom Hamilton is associate professor at the Shenehon Center for Real Estate Education at the University of St. Thomas in Minneapolis.

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