Understanding Capital Gains

A capital gain is a profit that results from the sale of an asset, such as stocks, bonds or real estate, which amounts to more than the purchase cost. This difference between sale price and original price (cost basis) is the capital gain. Capital gains  are often calculated for tax purposes and are not based on the purchase price but on its adjusted cost basis.

The IRS provides for a tax exemption on capital gains from the sale of a principal residence. Be sure to check with your Accountant or CPA for professional insight.


First, take the purchase price of the home. This is the sales price not the amount of money contributed at closing.

Second, determine the sales price or the final amount received in exchange for its recent sale.

Third, add adjustments:

+ cost of purchase, including inspections, transfer fees, attorney fees

+ with the exception of points paid on a mortgage

+ cost of improvement, including decks, casitas, room additions with the exception of repair or replacement to something already in existence such as a roof or air conditioning unit

+ cost of sale, including inspection fees, attorney’s fees, commissions and money spent on the home to ready it for sale

finally, total the adjusted sale price and subtract the adjusted cost basis from the amount the home is sold for to determine the capital gain.

(from Title360 Home Seller’s Guide)

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