How do I estimate taxable gain when I sell my long-time principal residence?

Question

AcadiFi · Accepted Answer

Start with adjusted basis, then compare it with the amount realized, then apply the principal residence exclusion if the ownership and use tests are met. Adjusted basis begins with original cost and then increases for capital improvements such as major additions, new roofs, or structural renovations. Selling costs can also reduce the amount realized when computing gain.

Suppose Silver Harbor Realty has a taxpayer who bought a home for $182,000 years ago and later spent $170,000 on qualifying improvements. The home is sold for $775,000, and selling costs are $25,000. Amount realized is $750,000. Adjusted basis is $352,000. Gain before exclusion is $398,000. If the taxpayer qualifies for the $250,000 principal residence exclusion, taxable gain may be reduced to about $148,000. If filing jointly and both spouses qualify, the exclusion may be larger.

```mermaid
flowchart LR
  A[Sale price] --> B[Less selling costs]
  B --> C[Amount realized]
  D[Original cost] --> E[Plus improvements]
  E --> F[Adjusted basis]
  C --> G[Gain before exclusion]
  F --> G
  G --> H[Apply home sale exclusion]
```

The EA exam loves basis adjustments and exclusion rules. Do not jump straight from sale price to tax. Build the calculation in pieces and the result becomes much easier to trust. Practice more in our EA question bank.

How do I estimate taxable gain when I sell my long-time principal residence?

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