Those of us who remember publisher-millionaire Steve Forbes’ presidential campaigns may still be able to close their eyes and hear his mantra: “Do the math.” His platform was based on instituting a flat tax rate for income tax. It sounds so easy. But so does a comedian’s tax reform idea: “How much did you make? Pay that amount.”
Tax law is complicated. There’s no way around it. We have been talking about capital gains and the sale of a taxpayer’s primary residence. As usual, what initially appears to be a fairly straightforward calculation is not. In our last post we took the first step by explaining how to figure out how much of the sale price, if any, is taxable. Specifically, we were discussing adjustments that have increase the basis.
The things that would decrease the basis are generally anything that would decrease the value of the home. For example, your neighbor pays you $50,000 for a right-of-way and builds a driveway from the main road across your land to his land. That $50,000 is deducted from the basis, because, in essence, you have already sold the right to that strip of land. You can’t sell it twice.
Similarly, during the mortgage meltdown, lots of homeowners realized they owed more on their mortgages than their homes were worth. Government programs helped many homeowners by reducing the principal of the mortgage note. In this context, if Bob owed $100,000 on his mortgage, and the government program managed to lower the principal to $80,000, the $20,000 difference is deducted from the basis.
You aren’t quite done yet, though. We’ll explain in our next post.
Source: Internal Revenue Service, “Publication 523: Selling Your Home“