Capital Gains Tax

When you sell a stock, you owe taxes on your gain—the difference between what you paid for the stock and what you sold it for. The same is true with selling a townhouse (or a second townhouse), but there are some special considerations.

How to Calculate Gain

In real estate, capital gains are based not on what you paid for the townhouse, but on its adjusted cost basis. To calculate this:

1. Take the purchase price of the townhouse: 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.
3. The total of this is the adjusted cost basis of your townhouse.
4. Subtract this adjusted cost basis from the amount you sell your townhouse for. This is your capital gain.

A Special Real Estate Exemption for Capital Gains

Since May 7, 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a townhouse is exempt from taxation if you meet the following criteria:

• You have lived in the townhouse as your principal residence for two out of the last five years. (There are some exceptions to the two-year residency rule for health and job changes.)
• You have not sold or exchanged another townhouse during the two years preceding the sale.
• Allows the exclusion to be used an unlimited number of times, but only once in a two-year period of time.
• Taxes profits in excess of the $500,000/$250,000 exemption at a new, lower capital gains tax rate of 20%. (The tax rate for low-income brackets is only 10 %.)
• Contains no rollover provision and no $125,000 once-in-a-lifetime exclusion.

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.

Investors, if you would like to find out how to maximize the profits from the sale of your investment properties while minimizing the amount of taxes you have to pay send us an e-mail to FinancialSecurity@VirginiaIsForTownhomes.com and we will have all of the answers to your questions and give you access to an estate planner who can set you down the path to early retirement.