Is principal paid on mortgage considered equity in the home?

[foxsp]

I purchased my home 40 years ago for 50,000.  I have refinanced several times doing a cash out each time.  The home is now being sold for $400,000.  I currently owe $200,000 on the mortgage.  During the 40 years of ownership I have paid a cumulative total of about $100,000 towards the principal on the loans.  There have been no improvements to the property that would add to the $50,000 basis.  How does the $100K of principal payments affect the capital gains calculations?  Where to I account for the principal payments on the tax forms? 

[bwa · Accepted solution]

Principal payments on a loan do not have any effect on basis.  Money borrowed is not taxable and does not increase or decrease basis, loans repaid are not deductible and do not income or decrease basis.  For example, when you purchased the home for $50,000 your basis was $50,000 whether you borrowed all or none of the purchase price.

Based on your figures, you would have an approximate $350,000 gain.  If you lived in the house for two of the five years preceding the sale none of the gain would be taxable (so additional basis would have no effect on your taxes.)

[TaxGuyBill]

Just a clarification:  If you are Married, none of the gain would be taxable.  If you are not, only $250,000 of the gain can be excluded.  The rest would be taxable.

As a side note, there is a good chance that you have done improvements that would increase the basis.  Roof, furnace, etc. would increase the basis.

[SweetieJean]

See page 12 here:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/pub/irs-pdf/p523.pdf">https://www.irs.gov/pub/irs-pdf/p523.pdf</a>

[Carl]

No capital improvements? While possible, it's highly improbable. I would expect over 40 years you're replaced the central A/C at least twice, and have replaced the roof at least once, if not twice. What about the windows? I doubt it still has the original jealousy windows that may have been in the house at the time of purchase. Has the hot water heater lasted the entire 40 years? You never updated the kitchen or bath?  All such expenses add to your cost basis.