A Tax on Your House

In 2004 it seemed like almost everyone was buying, selling or remodeling a home.

No surprise, then, that the Commerce Department reported that sales of new single-family homes climbed 8.9% last year to a record high of 1.18 million, up from 1.09 million in 2003.

But with new homes come new tax issues. Here's what you'll have to grapple with this April.

Selling a Home

How long did it take you to sell your home? Were you bragging about it at the water cooler?

It was not uncommon to hear about a seller who sold his home in three days, got caught up in a bidding war and ended up with an extra $20,000 over the asking price. As crazy as it sounds, it happened over and over again, and it is still commonplace in certain "red hot" markets.

Fortunately, most of those sellers can walk away with those big gains. The rules say that as a single person, you won't owe tax on up to $250,000 (for married couples, it's $500,000) of the gain from the sale of your main home if you owned and lived in it as your principal residence for two of the five years prior to the sale.

So if you owned and lived in your home for at least two years, then sold it for a $450,000 gain, you won't owe a tax dime on that money.

To calculate that gain, though, you must first know your basis in the home. Basis is tax jargon for your original cost plus any home improvements.

If, for example, you built a deck or replaced the roof, those extra costs should be added to your original cost to calculate your basis in the home. Then subtract your basis from the selling price of the house. That result, less any selling expenses you paid, is your final gain (or loss). Selling expenses are your closing costs, and they include items such as broker's fees, fees for drafting the contracts of sale, escrow fees, recording fees and title insurance. Note: Closing costs are not deductible; this is a common misconception.