Buying the same home twice

[dlazyh]

I bought our home in the mid-80's for $40,000, 25 years later through divorce, I bought the ex's share of the home for $100,000. Now 10 years later, I sell the house for $185.000. My question is how much would be a capital gain?

[Opus 17]

That's simple but also could be tricky.  Your gain is the difference between the selling price and your adjusted cost basis.  

If you bought the home before the marriage, then your basis is $140,000.  You paid $40,000; your spouse acquired half ownership on marriage, then you paid your ex $100,000 for their share.

If you bought the home with your spouse, then your basis is $120,000; your basis in your half was $20,000, plus the $100,000 you paid for your spouse's share.

You can then increase your cost basis by any permanent improvements that are still part of the home, such as remodeling, new roof, new furnace.  (If you replaced the furnace in 1990 and again in 2015, only include the cost of the second replacement that is still part of the property.

You must also reduce your basis if you used the home in business, or ever took a deduction for a casualty loss.

Also, if you had previously owned a home in the 80s, and you postponed the gain from that home when buying this home, you must reduce your basis by the postponed gain.  The gain postponement rule was eliminated in 1997, but you must account for previously postponed gain if you have any.

As I mentioned, the gain postponement rule was eliminated in 1997.  Now, it is much more simple.  If you owned your home at least 2 years and lived in it as your main home at least 2 of the past 5 years, you can exclude the first $250,000 of capital gains, or $500,000 if married filing jointly.  Under any calculation of cost basis, your gain would be less than $250,000 and won't be taxable if you have lived in the home as your main home.

If you lived other places as your main home (making this home sometimes a rental or second home), then your gain may still be partly taxable.  This is a very complicated topic and we would need more details to walk you through it. 

[dlazyh]

Complicated is an understatement! After the initial purchase, 4 years later, we added more to the structure, roughly about $30,000 for extra an extra room and attached garage. Then about 15 years after purchase, I had the roof re-shingled and repaired as necessary.   Thanks for the information. I had to re-read it a couple of times, (I'm a little slow...lol) and I will run with your explanation.

[dlazyh]

What form would I use to fill out the cost of any permanent improvements? I'm not seeing any thing that I can use that will show how to enter expenses I've spent to make capital improvements from the initial purchase until the sale of the house. Thanks

[Opus 17]

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@dlazyh wrote:

What form would I use to fill out the cost of any permanent improvements? I'm not seeing any thing that I can use that will show how to enter expenses I've spent to make capital improvements from the initial purchase until the sale of the house. Thanks

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There is a worksheet in publication 523 you can use to document your adjusted basis.

https://www.irs.gov/pub/irs-pdf/p523.pdf

On your actual tax return, you don't report any of your adjustments.  You just give the final adjusted basis, and the selling price.  If the IRS wants to see the details, they have 3 years to ask, so keep your worksheet and other documents like contractor bills for at least three years.  But you don't send them to the IRS with your return.