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How do I determine the cost basis of my home?

December 8, 2011: 5:05 AM ET

I am planning on selling my home in the not-too distant future. I had my old house (which I purchased in 1990) torn down in 2003. In determining the adjusted basis of my present home when I sell, can I use the value of the land of my old house at the time it was torn down, or do I have to use what I originally paid for the house back in 1990? -- Name withheld

When you sell your home, the IRS is interested in your gain or loss on the sale. And when you've made changes—anything from renovations to demolishing the house and building a new one—you have to determine an adjusted basis before you can calculate your capital gain or loss. For you, that calculation includes several numbers, says John Graziano, a CPA and financial planner in Bayonne, N.J.: what you originally paid for the home (which includes the land plus the original settlement costs), the demolition expenses, and cost of building a replacement home.

The good news is that if you're talking about your primary residence, and you've owned and lived in it for two of the five years before you sell, up to $250,000 of your gain is free of taxes. If you're married and filing jointly, you can bump that exclusion amount up to $500,000.

--Kate Ashford

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