The purchase price paid at acquisition, inclusive of closing expenses, represents the cost basis for calculating the gain or loss for an owner-occupant residential property.
To calculate the gain or loss for an owner-occupant residential property, the purchase price paid at acquisition, inclusive of closing expenses, represents its cost basis. The cost basis is the total amount of money spent to acquire the property, and it includes not only the actual purchase price but also additional costs associated with the acquisition, such as closing costs, legal fees, title insurance, and any other relevant expenses.
The cost basis is a critical factor in determining the capital gain or loss when the property is sold. To calculate the gain or loss, you subtract the cost basis from the selling price. If the selling price is higher than the cost basis, it results in a capital gain. Conversely, if the selling price is lower than the cost basis, it leads to a capital loss.
The formula for calculating gain or loss is:
Gain or Loss = Selling Price−Cost Basis
Understanding and accurately accounting for the cost basis is essential for homeowners to assess their financial position and potential tax implications when selling their owner-occupied residential property.