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You may feel uncertain about what a capital gains tax is and how real estate capital gains taxes are figured. Once you know more about how these taxes affect your bottom line, you will feel more confident in making the best decision for your investments. Think about real estate capital gains taxes in terms of buying and selling stock. Once you have sold a stock, you then must pay taxes on the difference between the amount you paid for the stock and the amount you received from the sale of the stock. When you sell real estate, the same principle applies, although there are some circumstances that change the application of the tax. To decide what your capital gain is, the first step is to write down the purchase price of the home. The term "purchase price" refers to the actual sale price of the home, regardless of the amount that you contributed at the closing table. You can then find out what your adjustments will be based on the cost of the purchase, the cost of the sale, and the cost of improvements. When you determine the total cost of the purchase, you should also include any attorney or transfer fees you incurred during the purchase, as well as the cost for any inspections. Be aware that you can't count any points that you may have paid on your mortgage when you figure the cost of the purchase. The cost of the sale includes the inspection and attorney's fees, as well as the real estate commission and any money you invested in making improvements to your home to increase the value before you sold it. Any improvements such as the addition of a pool or deck, or any extra rooms that have been added, should be totaled. Exceptions here would be anything you repaired or replaced that already existed within the property before. Installing a new air-conditioning unit, for example, would not be able to be counted toward the cost of improvements. The next step in figuring your capital gain is to add the total of all three types of adjustments to the purchase price. You will then need to subtract the newly totaled costs from the amount that you receive for your home when it sells. This is your capital gain. There are some exemptions that you are eligible for if you have lived in the home as your main dwelling for two out of the previous five years, have not sold or traded another home for the two years prior, and meet criteria termed by the IRS as "unforeseen circumstances." These circumstances include losing your job, getting a divorce, or experiencing a family medical emergency. Calculating your real estate capital gains is relatively easy, but if you have any questions, you may want to seek the advice of a real estate tax professional or attorney.
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