Summit County Colorado has been experiencing double digit year over year appreciation. Lately the question of gains on our owners properties have been a popular question. Many of our owners are second or vacation home owners. So I will try to answer the question "how do I calculate a gain."
In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. To calculate this:
1. Take the purchase price of the home: This is the actual sale price, not the amount of money you actually brought at closing.
2. Add Adjustments:
- Cost of the purchase-including transfer fees, attorney fees, inspections, but not points you paid on your mortgage.
- Cost of sale-including inspections, attorney's fee, real estate commission, and money you spent to fix up your home just prior to sale.
- Cost of improvements-including room additions, deck, etc. Note here that improvements do not include repairing or replacing something that currently exists, such as putting on a new roof or buying a new furnace.
3. The total of this is the adjusted cost basis of your home.
4. Subtract this adjusted cost basis from the amount you sell your home for. This is your capital gain.
A special real estate exemption for capital gains
Since 1997, up to $250,000 in capital gains ($500,000 for a married couple) on the sale of a home is exempt from taxation if you meet the following criteria:
- You have lived in the home as your principal residence for two out of the last five years.
- You have not sold or exchanged another home during the two years preceding the sale.
Also note that as of 2003, you may also qualify for this exemption if you meet what the IRS calls "unforeseen circumstances" such as job loss, divorce, or family medical emergency.
Keep in mind that the capital gains treatment for a primary residence is different from the tax treatment on a second home or investment property. Capital gains on investment properties can be deferred through the purchase of a replacement property with the use of a 1031 Tax Deferred Exchange. The above criteria does not apply when selling a second home or investment property. However any second home can become a primary residence and all the above rules apply if you live in that home more than six months a year. Remember to always consult a tax professional. Now go have some fun and buy some property.
Jason Long
The Long Group
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Hi Jason, great post. Welcome to Active Rain!
Good job Jason. You spent a lot of time on this and it is informative. Welcome!
Great resourceful tool. Thanks
Good information, and well thought out. It helps the lay person understand how the gain is computed. Kudos.
Hey Jason,
What kind of changes have you seen in your residential market since you post this?
Hi William,
We have been seeing about 25% yoy (year over year) sales volume increases with the exception of October where we saw a 22% decline in volume. I attribute this to the credit crunch in August and September. However November's numbers are incredible and we look to be back on track. Most of all our homes and condos are Jumbo loans so we were somewhat effected when the credit crunch happened.
We are mainly second home owners so many of our owners not only look at their properties as vacation homes but also as an investment. Most of the major ski resorts continue to do well and they usually buck the national down trend in housing prices. We are somewhat insulated due to low to no land availability and being a tourist destination. Plus with the prices in Aspen and Vail we look relatively cheap in comparison and have all of or more amenities than they do. We are seeing folks sell in those areas and buy here. We have have also had an incredible run up in Steamboat Springs and some of those folks are selling there and buying here. I attribute this due to Steamboat being so remote and the Summit area having more resorts and more shopping. I think they see it as a chance to cash out and buy a place that will be more useful for their family.
So in essence we keep plugging along and home price appreciation looks to be stable in the low double digits yoy.