January 30, 2012

Do you know the arithmetic of real estate sales?

An old quote says real estate and arithmetic are acquired together. The two also go together when figuring the tax consequences of selling property.

Here are numbers to know.

Amount realized. How much did you get for the property? You may think first of the selling price, but noncash receipts also affect the amount realized. For example, if the buyer assumes an existing mortgage, the amount you no longer have to pay on the loan increases the amount realized.

Adjusted basis. To calculate adjusted basis, start with what you paid for the property, add the cost of capital improvements, and subtract amounts you recovered through tax benefits during your ownership, such as depreciation or certain energy credits.

Gain or loss realized. Subtracting adjusted basis from the amount realized gives you the gain or loss on the sale.

In general, the gain or loss realized is the same as the amount recognized on your tax return, though there are exceptions. One you're probably familiar with applies when you sell your principal residence. Sell at a loss, and it's considered personal and nondeductible.

If you have a gain on a home sale and meet certain requirements, you can exclude the gain from income.

Did you sell property in 2011? Give us a call. We're happy to help with the math.