Part 2: Minimizing home-sale taxes
Home sellers benefit from adjusted cost basis:
The starting point for avoiding long-term capital gains tax on the profitable sale of your personal residence and investment real estate is its adjusted cost basis. This number is needed because it must be subtracted from the property seller’s “adjusted sales price” to arrive at the long-term capital gain when the property is sold. Most property owners think their adjusted cost basis is their purchase price. As we will see, that is often wrong!
1. The basic “adjusted cost basis” rule. The starting point is usually (a) the property purchase price, plus (b) any purchase expenses that were not tax deductible at the time of purchase.
EXAMPLE: If you bought your personal residence for $200,000, paid $2,000 in tax-deductible loan fee points to obtain your home acquisition mortgage, and paid $5,000 in various non-deductible closing costs such as transfer fees, attorney or escrow charges, and title fees, your home’s adjusted cost basis is $205,000. The $2,000 mortgage loan fee points qualify as an itemized income tax deduction in the year of home purchase. Each “point” equals 1 percent of the amount borrowed. But the mortgage amount doesn’t matter for determining the adjusted cost basis.