UNDERSTANDING THE IRS CODE
current capital gain exemption equaling $250,000 for single persons and
$500,000 for a married couple has made it less necessary to maintain records
for future adjustments to basis, etc. It is still recommended that a seller be
familiar with the above terms and retain good records as the tax code has a
habit of being revised regularly. Plus, if the gain from a sale exceeds the
exclusion the ability to adjust the basis may become important in saving
capital gain taxes.
It can seem as though the federal government tries to confuse us with all
those terms related to the purchase and sale of a home. There is a reason for
all of the terms....the plan is to make sure we pay our fair share of taxes
due, but only on the actual amount of gain. Thus, we have all of the
adjustments for various expenses, fix-up costs and previous gains, in
determining the amount upon which taxes are owed.
This glossary of terms may be a helpful reference when preparing to buy or
sell a home.
ADJUSTED BASIS: The original cost (basis) of your home with
adjustments made. Positive adjustments (those added to the original basis)
include the cost of any capital improvements or additions and expenses incurred
when the home was purchased (i.e.; fees paid to a buyer's broker or an
attorney). Negative adjustments (those subtracted from the original basis)
include any casualty loss deductions that were taken on the home and gains
accumulated via the sale of previous homes.
Items added to the basis will ultimately reduce the amount of capital gain
to be paid upon sale while items subtracted will mean more capital gain
A property's original basis depends upon how it was acquired. Although basis
generally refers to the home's cost, it is different if the home is received as
ADJUSTED SALES PRICE: Amount realized on a home sale minus the
qualified expenses of fixing up the home in preparation for sale.
AMOUNT REALIZED: Selling price minus selling expenses.
FIX-UP EXPENSES: Cost of work performed on a home
to assist in its sale. The work must be done within 90 days before or
after a purchase agreement is signed. Moreover, these expenses must be paid
within 30 days after the actual closing date. Fix-up expenses do not include
expenses that can otherwise be deducted from taxable income, selling expenses,
or capital improvements.
SELLING EXPENSES: Items paid to complete the sale of a home, but not
for work done to the home itself. These include the broker's commission,
advertising costs, escrow fees, legal fees and loan fees (such as points paid
to a lender to help a buyer obtain a mortgage).
SELLING PRICE: The total amount paid by buyer to
purchase a home. This includes cash, the fair market value of any other
property received, any seller liabilities assumed by the buyer (for instance,
if the buyer paid the seller's real estate commission), and any liabilities
assumed on the home purchased (for example, if an existing mortgage is
While these terms are the basic ones used in identifying tax liability, it
is always recommended that one consult tax counsel following the sale or
purchase of a major asset.
Web Page/IRS Code