"Door County Real Estate" by: Kevin Nordahl, REALTOR®

Understanding Capital Gains in Real Estate (Part I)
(Portions reprinted by permission of National Association of REALTORS)

As a homeowner or potential second home owner in Door County you have a lot riding on the investment of real property. When you’re miles away from your investment it should comfort you to know that our tax system is there, ever present, to help you out.

As the President of the Door County Board of REALTORS and a real estate consultant I am routinely asked, “When is IT (word used to describe increasing property values) going to end?” Please, none of us REALTORS are genies or a tellers of fortune. There is not a crystal real estate ball we gaze into. If there was, I would likely not be working so hard every day. The best answer is to look at the past (both distant and recent) and say, “Things have never looked better” and that would be telling the truth.

There are a number of economic principals we do crunch numbers on to look at trends. But since when have forecasted market trends really been accurate? Door County is hot. It’s cheap (by suburban comparison) and it is remarkably beautiful, period. Simply put, REALTORS are in the business of selling and not investment analysis. For that you need a different license. Here are some helpful hints to manage your real estate fortune and get into the exciting world of second home ownership.

When you sell a stock, you owe taxes on your gain—the difference between what you paid for the stock and what you sold it for. The same is true with selling a home (or a second home), but there are some special considerations.

How to Calculate Gain
In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. Here’s how to get a rough calculation of this when you sell:

1. Take the purchase price of the home: This is the sale price, not the amount of money you actually contributed 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 already there, 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.

Next issue, the 1031 tax deferred “Starker” exchange.

Kevin Nordahl is a life-long resident of Door County, a REALTORŽ and a member of the Door County MLS. He is a Past President of the Door County Board of REALTORS® and a Senior Sales Consultant at Coldwell Banker Door County Horizons in Fish Creek. He may be reached online at knordahl@doorcountyrealestate.com or by phone at (920) 493-4004.

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