What is the Capital Gains On Primary Residence


The capital gains on primary residence of your main residence, or main home, is a combination of many factors.

Main Home Definition for Capital Gains On Primary Residence

Usually, the home you live in most of the time is your main home and can be a:

  • House
  • Houseboat
  • Mobile Home
  • Cooperative Apartment
  • Condominium

Capital Gain Land

If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land.

Capital gains on primary residence example: On May 10, 2013, Bill Alexander sold the land on which his house was located. Bill purchases another piece of land and moves his house to it. This sale is not considered a sale of his main home, and he cannot exclude any gain on the sale of the land.

Capital Gain Vacant Land

The sale of vacant land is not a sale of your main home unless:

  • The vacant land is adjacent to land containing your home
  • You owned and used the vacant land as part of your main home
  • The sale of your home satisfies the requirements for exclusion and occurs within 2 years before or 2
    years after the date of the sale of the vacant land
  • The other requirements for excluding gain from the sale of the vacant land have been satisfied.

If these requirements are met, the sale of the home and the sale of the vacant land are treated as one sale and only one maximum exclusion can be applied to any gain.

Capital Gains On Primary Residence When Owning More Than One Home

If you have more than one home, you can exclude gain only from the sale of your main home. You must include in income gain from the sale of any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

Capital Gains On Primary Residence Example 1: Mikenzie Laird owns and live in a house in Los Angeles. She also owns a beach house in San Diego, which she uses during the summer. The house in Los Angeles is MiKenzie’s main home.

Capital Gains On Primary Residence Example 2: Joshua owns a house in Ventura but lives in another house in Oxnard that he rents. The rented house is Joshua’s main home.

In addition to the amount of time you live in each home, other factors used to determine your main home for the capital gains on primary residence are:

      1. Your place of employment.
      2. The location of your family members’ main home.
      3. Your mailing address for bills and correspondence.
      4. The location of the banks you use.
      5. The location of recreational clubs and religious organizations you are a member of.
      6. The address listed on your:
    • Federal and state tax returns
    • Drivers license
    • Car registration
    • Voter registration card

Calculating Gain or Loss on Primary Residence

To determine the gain or loss on the sale of your principal residence, you must determine the selling price, the amount realized, and the adjusted basis. The formula is as follows:

      Selling Price (A) –
      Selling Expenses (B)
      ————————–
      Amount Realized (C)

      Amount Realized –
      Adjusted Basis (D)
      ————————–
      Gain or Loss

Selling Price (A)
The selling price is the total amount you receive for your home. It includes money, all notes, mortgages, or other debt assumed by the buyer as part of the sale, and the fair market value of any other property or any services you receive.

Selling Expenses (B)
Selling expenses include:

  • Commissions
  • Advertising fees
  • Legal fees
  • Loan charges paid by the seller, such as loan placement fees or “points”

Amount Realized (C)
The amount realized is the selling price minus selling expenses.

Adjusted Basis (D)
While you owned your home, you may have made adjustments (increases or decreases) to the basis. This adjusted basis must be determined before you can figure gain or loss on sale of your home.

Example: Brett purchases a home 5 years ago for $250,000. He plans on selling it now for it’s current fair market value of $675,000. Over time he made improvements to his house at a total cost of $40,000. The taxable gain on the sale of his primary residence is $135,000 determined as follows:

Adjusted Basis
Original cost $ 250,000
Improvements$ 40,000
Adjusted basis $ 290,000
Taxable Gain
Sales Price$ 675,000
Adjusted basis($290,000)
Gain$ 385,000
Exclusion (single individual)($250,000)
Taxable Gain $ 135,000

Note that you need to keep detailed records to prove your adjusted basis if you make improvements. You also need to be aware that if you take a depreciation deduction, due to having a home office for example, you will need to recapture the cost of the depreciation on the sale of your primary residence. This is covered in detail on the property selling main page.

Loss on Sale of Primary Residence

A loss on the sale of your principal residence is NOT deductible. If part of your principal residence was used for business you will treat the sale as if two pieces of property were sold. A loss is deductible only on the business part.

Jointly Owned Home

If you and your spouse sell your jointly owned home and file a joint return, you figure your capital gains on primary residence or loss as one taxpayer.

Separate Returns – if you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Your ownership interest is determine by state law.

Joint Owners Not Married – If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home.

Primary Residence Exclusion

You may qualify to exclude from your income all or part of any gain from the sale of your main home. This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under the Maximum Exclusion.

Click this link to learn more about this rule, which is commonly known as the “Primary Residence Exclusion“.


For more information on Capital Gains on Primary Residence, visit the IRS site; Tax Topic 409.

http://www.irs.gov/publications/p523/ar02.html

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