HOW ARE CAPITAL GAINS CALCULATED WHEN HOUSE IS SOLD?

DEAR BOB: How are capital gains calculated? Is it the difference between the purchase price of a house and its selling price? What about improvements to the house? Does the mortgage matter if it has been paid off? --Chad S.

DEAR CHAD: Real estate capital gains tax is calculated on the difference between your adjusted cost basis and your adjusted (net) sales price.

The mortgage balance is immaterial, even if you refinanced.

The cost of capital improvements you made should be added to your original purchase-price cost basis. If it is a rental property, don't forget to subtract the depreciation deducted during the rental period to arrive at the adjusted cost basis.

If the house was your principal residence at least 24 of the 60 months before its sale, then you (and your wife) might qualify for the Internal Revenue Code 121 tax exemption up to $250,000 (up to $500,000 for a qualified married couple). For full details, please consult your tax adviser.

The new Robert Bruss special report, "Pros and Cons of Today's Five Best Real Estate Profit Opportunities," is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, CA 94010 or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.

(For more information on Bob Bruss publications, visit his
Real Estate Center).

Copyright 2006 Inman News