@andys1027
So, you will have a taxable gain. You certainly got the benefit of the gain, since you are now living in a more expensive property. If the fire had never happened, and you sold for $425K and bought a new place for $425K, you would owe the same tax on the same gain.
From your specific description, your adjusted cost basis is $67K plus $10K for the a/c improvement. There may be some closing costs from 1985 that can be included as well, you would have to still have a copy of your documents and then review the list of allowable costs in publication 523.
As far as selling expenses, you have to consider three types.
1. Improvements -- something permanently attached to the home that increases its value. That can also be added to the cost basis. That would probably be the ceiling fan. Maybe the blinds if they are permanently attached (my house has plantation shutters that are screwed to the windows, that would count, but fabric blinds probably would not.)
2. Advertising -- that would include staging, but does not include anything that changes the house. For example, some people paint to help sell, that is not an allowable expense.
3. Anything that changes the house -- like painting, or blinds. This is just something you pay for, it does not reduce your gains.
Your selling price is $425K. The dollar amount of the net proceeds to you are irrelevant and not considered, although some of the adjustments and closing costs are allowed, you would need to read publication 523 and look at your closing statement.
Let's assume that $35,000 of your selling expenses are allowable adjustments, plus $1000 for the ceiling fans. That means your selling price after adjustment is $389,000. Let's also assume you can find $1000 of allowable closing costs from your purchase in 1985. That makes your adjusted cost basis $78,000. That gives you a total capital gain of $311,000. After the $250,000 exclusion, your taxable capital gain is $61,000.
Your income after taxes is not relevant, you look at your gross taxable income, and add the capital gains. Remember that social security is partly taxable especially if you have other income like a pension. Based on your total financial situation, some of the $61,000 of gain will be tax-free, but most of it will be taxed at 15%. So you will likely owe around $9000 in capital gains tax.
Remember you did get the benefit of the gain even if you didn't see the cash.
