Dear Tax Talk,

I bought my house 30 years ago for $35,000 and am now selling it for $550,000. I had a loss in the stock market 10 years ago for $150,000. I have been writing off $3,000 per year for the capital loss against ordinary income. Can I write off the remaining $120,000 as a capital loss against the capital gains on my home when I do sell the property?
— Bill

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Dear Bill,
Yes, your capital loss carryover may be deducted against the capital gain on the sale of your house. Keep in mind, if your capital losses were to exceed your capital gain, the amount of the excess loss you can claim is the lesser of $3,000 ($1,500 if you are married filing separately) or your total net loss.

For example, if the gain on your home is $100,000 and you have $120,000 loss carryover, then you can deduct $103,000 (if you’re married filing jointly) and carry over the remaining $17,000 to future years. The net loss would be $103,000.

Now let’s go over the calculation of the capital gain on the sale of the home. Here’s how it works:

  • The first step is to deduct all of your selling expenses, including commissions, advertising, legal fees and any seller-paid expenses from the selling price of the home to come up with the “amount realized” on the sale.
  • The next step is to deduct your “adjusted basis” from the amount realized to come up with your gain on the sale. Your adjusted basis is your original cost of the home increased by any capital improvements you made over the past 30 years.

What is a capital improvement?

A capital improvement is a permanent structural change to real property, such as an addition or expansion, or the replacement of a major component of the property. Examples are a new roof, swimming pool, renovation costs, etc. It does not include normal wear and tear expenses such as painting and various repairs.

Once you calculate the gain from the sale of the home, you need to determine if you qualify to exclude $250,000 ($500,000 if you file a joint return) from taxation. Generally, you will qualify if you meet the ownership and use tests. This means you have to have owned and used your home as your main residence for at least two years out of the five-year period ending on the date of the sale.

For all the important details on claiming this exclusion from your gain, be sure to take a good look at IRS Publication 523 entitled “Selling Your Home.” The gain is reported on Schedule D, Capital Gains and Losses, which is also where your capital loss carryover shows up to be deducted.

Congratulations on the very wise investment in your home and all the best to you!

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