How is the Capital Gains Tax determined on my home?

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Determining capital gains tax exposure requires answering a few basic questions.

  • First, what is your cost basis in your home? If you purchased your home, your cost basis is your purchase price plus any improvements that will last more than one year. If you received the home as a gift during the donor’s lifetime, your cost basis is the carryover basis from the donor. If you received the home as an inheritance resulting from the donor’s death, your cost basis is the date of death value of the home.
  • Second, what is the sale price of the home? The sale price minus your cost basis represents the capital gain.
  • Third, have you lived in your home for two out of the previous five years and owned your home for two out of the previous five years? You can meet the use test and ownership tests during different two year periods. They both simply have to occur during the same five-year period ending on the date of the sale of the home. Also, the two years of use and ownership do not have to be continuous. For the use test, temporary absences (approximately two months at a time) are counted as periods of use. There are exceptions to the ownership and use test for certain circumstances. For example, if you have to move from your home to a care facility licensed by the state because you are physically or mentally unable to care for yourself the use test is decreased to a total of at least one year during the five year period prior to the sale of the home. If you meet this exception to the use test, you still have to meet the two-year ownership test, however.

If you meet both tests you may qualify to exclude up to $250,000 of the gain from your income. If you file a joint return with your spouse, you may be able to exclude up to $500,000 of the gain. However, you cannot use the exclusion if you or your spouse excluded gain from the sale of another home during the two years prior to the sale of your home.

The capital gains tax is based on the amount of capital gain, minus any exclusion, on your home. Because this is an income tax, the amount of tax due will depend on your particular tax filing situation.

An experienced estate planning attorney and/or certified public accountant can discuss capital gains tax exposure for your specific situation and advise you on your options. Contact the estate planning attorneys with the Law Offices of Nay & Friedenberg in Portland, Oregon at (503) 245-0894 to set an appointment.