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Here is a question using hypothetical amounts when understanding the amount considered capital gain when selling real estate before two years. I want to understand, is the number I am calling capital gains correct? And is my rough calculation of my final profit seeming reasonable? Trying to understand if I can walk away without a loss, when selling before two years is up.

Tried to use numbers for easy math below, not to emulate real values.

Capital Gains Calculation

Amount Description
$500k closing amount for home sale
($50k) realtor fees
($300k) mortgage payoff
($10k) random other fees
$140k my capital gain that can be taxed

Is $140k the right number for the capital gain, in this case? And, below, does $25k seem logical for final profit?

After Tax Calculation

Amount Description
$140k capital gain
($30k) capital gains tax on above amount (a little over 20%)
($15k) interest paid on mortgage to try and reclaim for breaking even
($50k) down payment from initial transaction to reclaim
($20k) expenses on home improvements
$25k actual profit for me considering my expenses and tax
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    The cost basis should be what you paid for the house, not the "mortgage payoff". The mortgage payoff just tells you what you have left on the loan, which hopefully is less that what you paid for the house (unless you've tapped into the equity with a HELOC)
    – D Stanley
    Feb 8, 2023 at 18:18

1 Answer 1

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Assume that you had not done any home improvements then the basic calculation of capital gains is:

Capital gains = sales price - purchase price.

The amount of mortgage and the amount of the down payment don't play a role in the capital gains calculation.

It gets slightly more complex because you do factor in some of the purchase and sales costs. When you bought the place you may have had to pay various fess and taxes This is different than the annual property tax. These items essentially raise the pruchase price. The sales price is also modified due to the fess and taxes the seller pays at closing, plus the fee paid to the real estate agent. All these expenses should be listed in the closing documents for each transaction.

You mention home improvement costs. It can also impact the capital gains calculations depending on the type of improvements. Painting the kitchen doesn't count, converting a carport to a garage should impact the capital gains amount.

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