Legal Question in Real Estate Law in California

Re: captial game

You probably mean "capital gain."

Capital gain is simply the increase in value of an asset, like your home or corporate stock. Capital gain is in the simplest terms the increase in value between what you paid and what you receive when you sell. If you paid $300,000 for your house and you sell it for $500,000, you have a capital gain of $200,000. Lucky you.

Capital gains have to be reported on your tax return and often you have to pay capital gains tax. The rate is frequently 15%, but there are many exceptions and exemptions, including a generous exemption for capital gains on a house that has been your principal residence.

Most tax preparers and all good tax preparation software know and apply the rules for calculating capital gains tax. Both the IRS and California tax capital gains.

In the example above, the $300,000 paid for the house is the so-called "basis." This simply means the owner's cost for tax purposes. Tax law allows the basis to be increased or "stepped up" under certain circumstances, which is a positive thing for the owner because it reduces his ultimate tax burden when he sells. One thing that gives you an incresed basis is making permanent improvements, such as adding a pool or deck. Most repairs such as re-roofing don't give you a step-up, but perhaps if you went from 30-year to 50-year guarantee shingles, the excess cost could be added to your basis as an improvement.

Heirs inherit on a stepped-up basis. If grandpa bought the house for $30,000 back in 1960, and you inherit it at a time when it is worth $400,000, your basis is $400,000, not $30,000. This is good; it will reduce your capital gains considerably when you turn around and sell it in a few years for $450,000!

This is why it is usually better to inherit property or get it through a living trust rather than to become the owner or a joint tenant during grandpa's lifetime.

Re: captial game

The correct phrase is capital gain. You can be taxed on the appreciation of your capital assets. The original value of the asset or the acquisition value is known as the "basis." The appreciation is the difference between the value now and the basis.

Incidentally, if the value now is less than the basis, this is known as depreciation. This is a tax question, although I agree with the points set forth by Mr. Whipple.

Very truly yours,

Re: captial game

As regards real estate, I have never heard of "capital game." LIkely you mean "capital gain", which is taxable profit and calculated by subtracting what you purchased a property for from what you sell it for and adding the depreciation back in.