Calculating your Cost Basis

As tax time approaches, those who sold property in 2008 are faced with figuring out their capital gains or losses incurred. The task is less daunting than it seems. In order to calculate your profit or loss, you must subtract your cost basis from the sale price. The formula for calculating your cost basis is as follows:

Purchase price
+ Costs associated with purchase (attorney’s fees, title fees, escrow fees, real estate agent commissions …if you paid a Buyer’s Agent, etc.)
+ Improvements (Capital improvements like replacing the roof or furnace, etc. Interior painting, for example, does not qualify)
+ Costs associated with selling (attorney’s fees, real estate agent commissions, etc.)
- Accumulated depreciation (for example, if you ever took the office in the home deduction)
= Cost Basis

Then, if you subtract the cost basis from your sale price, you arrive at your taxable gain or loss incurred.

Don’t forget, the Taxpayer Relief Act of 1997 outlines a huge deduction available to individuals and couples in the sale of their primary residences. It states that if you lived in the property you sold for 2 of the past 5 years, individuals are entitled to deduct $250,000, and couples are entitled to deduct $500,000, from the total taxable gain. This tax break is a huge benefit for homeowners. (There are some exceptions to the 2 out of 5 rule based upon health concerns or other unforeseen circumstances. Seek professional guidance in these cases).

Two bits of advice: 1- Always consult your accountant and your attorney before buying or selling real estate to understand all of the tax ramifications. 2 - Keep good records of all of your capital improvements in order to assist your accountant with the task of determining your cost basis when it’s time to sell.