To most of the people, the house is not just a place where they reside but it is also an investment. Eventually, homes are likely to increase in value and this means that a homeowner can be able to make a profit if he sells his property. It is therefore important to establish the correlation between home appreciation and capital gains with regard to its implications with tax smart homeowning. Home appreciation and capital gains are objects of interest in this article as we will define them, show how they are computed and what steps a homeowner should take to reduce his/her tax burden.
What is Home Appreciation?
The concept of Property appreciation is used and it means the increase in the amount of vathe l for a home as time goes. There is usually the increase in value through factors such as the real estate market in a particular area, inflation and the improvement of the houses.
The appreciation depends with the locality of the property, the state of the home, the type of the economy and even the types of the economy. For instance, investment properties located in the up and coming neighbourhoods with good schools and other facilities will grow in value faster than the ones located in the unfavourable neighbourhoods.
Calculating Home Appreciation
It is not very easy to determine the value of home appreciation but common ways includes the evaluation of the difference between the price at which the home was bought and the price at which it is today.
For instance, a home owner buys a house for $200,000 and the house has a value of $300,000 the house has appreciated in value by $100,000. As such this computation is done with the understanding that no alterations including renovations have been done to the buildings.
Homeowners can also calculate appreciation using the following formula:Homeowners can also calculate appreciation using the following formula:
Appreciation = The current value minus the purchase price of the asset divided 100 by the purchase price of the asset.
For example, if a homeowner purchased a home for $200,000 and it is now worth $300,000, the appreciation can be calculated as follows:For example, if a homeowner purchased a home for $200,000 and it is now worth $300,000, the appreciation can be calculated as follows:
Appreciation = ($300,000 – $ 200,000) / $200,000 = 0. 5 or 50%
There are cases that the homes increase in value but it is also important to know that it also decline in value depending on factors that include the state of the economy and calamities like floods and fires.
What are Capital Gains?
Capital gains refer to any form of gains that one may get from the sale of any asset, for instance a house. If a homeowner sells a home for a higher price than the one that he /she bought it for, the amount left after the sale is more than the amount used to buy the house is known as capital gain.
Gains of capital, obtained from the sale of homes, are taxed and home owners are subject to taxes based on some factors such as the period of time they have owned a particular home and the level of income the possessor.
Calculating Capital Gains
The process of determining the capital gains from home sale is not always as straight forward as determining the home appreciation. The taxes owed varies with different parameters for instance, the tax rate of the homeowner, the time taken in possession of the home, the capital gains exclusion or any loss claimed.
The general formula for calculating capital gains on a home sale is as follows:The general formula for calculating capital gains on a home sale is as follows:
Capital Gains = Sale Price – Purchase Price of the Property – Cost of Improvements – Selling Costs.
Original cost is the amount the homeowner paid for the property while improvements consist of enhancements done to the house. Selling expenses are expenses related to hiring a real estate agent, closing costs on the sale of the house among other costs.
Conclusion
There is also allowed to subtract some costs from the agreed selling price in order to decrease the taxable capital gain of the homeowners. For instance, they may be qualified for capital gains exclusion that allows individuals to sell a home that is considered as their main residence at any given period, and not be subjected to tax if they have used the house in the previous two of the last five years. This exclusion enables homeowner to disallow up to $250,000 in capital gains in case they are single or up to $500, 000 in case they are married and filing jointly.
