Calculating Capital Gains

• The basic idea behind capital gains in real estate is that they equal the difference between what you paid for the house and what you sold it for. While this is a good place to start, it is not entirely accurate. When you calculate capital gains on real estate, you have to use the adjusted cost basis. To calculate the adjusted cost basis, you take the original selling price of the home and add to that the costs that you paid to buy the house. You can include fees and improvements. Then you take the new selling price of the home and subtract the adjusted cost basis from it.
  
  

Capital Gains Tax Exemption

• With other types of investments, you have to pay capital gains taxes on the gains when you sell them. With personal real estate, this is not always the case. If you have lived in your property for two out of the last five years and it was your primary residence, you can exclude up to $250,000 of capital gains as an individual. If you are married, you can exclude up to $500,000 of capital gains. This allows you to benefit from the appreciation in value without worrying about the tax bill.
  
  

Exceptions

• If you do not get to live in your house for a full two years, you may be able to exclude a portion of the capital gains from the sale of your house on your taxes. The IRS allows for some exceptions to this rule. They all deal with unforeseen circumstances, such as death or the separation of a married couple. If you have an unforeseen circumstance, you can generally exempt a portion of the capital gains from the house when you file your taxes.
  
  

Rental Property

• When you own a piece of property that is not your primary residence, you will have to worry about paying capital gains taxes if the property appreciates in value. This is a common issue with people who own rental properties. If you own the property for several years, you will pay taxes at the long-term capital gains tax rate of 15 percent. This means that when you sell a piece of rental property, you have to factor in the capital gains taxes so that you do not lose money on the deal.