Calculating Basis of Principal Residence
When selling a principal residence, the "basis" is deducted from the selling price (as well as any costs of selling) and the difference is then considered a taxable gain to the extent that is exceeds the exclusion amount (see other article "Exclusion of Gain" for more details). The "basis" is calculated for tax purposes by taking the original cost plus any improvements to the property, such as:
1. Capital Improvements can include such items as room additions, installing a new roof on a home, updating the central air conditioning, or rewiring a home. Additions to the "basis" include any improvements that have been done to the property that are not considered personal property or of a maintenance/repair nature. Capital expenditures typically increase the property's value.
2. Other items that can be included in the basis are brokers' commissions, lawyers' fees, etc. incurred in buying or securing title to the real estate.
Keeping accurate records of these expenditures can benefit the homeowner when it comes time to sell the property as these amounts are added to the original purchase price and will reduce the gain on the sale. Many homeowners make substantial improvements or investments in their residence and these expenditures can help to decrease any taxable gain upon sale.
Computing "Basis"
Original Cost $100,000 Add: Brokers' commissions, Lawyers' fees, etc. 6,000 Capital Improvements: - - Swimming Pool 30,000 - - New Roof 15,000 - - Install Air Contioning 6,500 - - Paint 5,000 Total "Basis" $162,500
It is not unusual for a homeowner to expend quite a substantial sum of money to make their principal residence a "home" that is more comfortable to live in. By saving receipts and keeping detailed files of these capital improvements, the taxpayer can take advantage of the increased basis used to compute the taxable gain upon sale, thereby paying less tax. It is usually advisable that a homeowner seek the advice of a qualified tax preparer to ensure that he/she is taking full advantage of these tax provisions.
1. Capital Improvements can include such items as room additions, installing a new roof on a home, updating the central air conditioning, or rewiring a home. Additions to the "basis" include any improvements that have been done to the property that are not considered personal property or of a maintenance/repair nature. Capital expenditures typically increase the property's value.
2. Other items that can be included in the basis are brokers' commissions, lawyers' fees, etc. incurred in buying or securing title to the real estate.
Keeping accurate records of these expenditures can benefit the homeowner when it comes time to sell the property as these amounts are added to the original purchase price and will reduce the gain on the sale. Many homeowners make substantial improvements or investments in their residence and these expenditures can help to decrease any taxable gain upon sale.
Computing "Basis"
Original Cost $100,000 Add: Brokers' commissions, Lawyers' fees, etc. 6,000 Capital Improvements: - - Swimming Pool 30,000 - - New Roof 15,000 - - Install Air Contioning 6,500 - - Paint 5,000 Total "Basis" $162,500
It is not unusual for a homeowner to expend quite a substantial sum of money to make their principal residence a "home" that is more comfortable to live in. By saving receipts and keeping detailed files of these capital improvements, the taxpayer can take advantage of the increased basis used to compute the taxable gain upon sale, thereby paying less tax. It is usually advisable that a homeowner seek the advice of a qualified tax preparer to ensure that he/she is taking full advantage of these tax provisions.
