Capital Gains tax is the difference between what you paid for your home and what you sold it for. However, these gains are not solely based on what you paid for the home, but on its adjusted cost basis. This is calculated as follows ( #'s are only for example):
A. Purchase Price (The full sales price, not just your mortgage amount): $200,000
B. Total Adjustments (combination of the following): $10,000
1) Total cost of the purchase including transfer fees, attorney fees, inspections...does not include points you paid on your mortgage
2) Total cost of your Sale including attorney fees, any real estate commissions paid, money you spent on fixing up your home to prepare for the sale and inspections.
3) Total cost of improvements including any structural additions, but not including needed repairs or replacements of items.
C. The Adjusted Cost Basis (add together A & B above): $210,000
D. Sale Price of Home: $250,000
E. Total Capital Gains (Subtract C from D above): $40,000
F. Real Estate Capital Gains Exemption: As of 1997, Single Homeowners are exempt from paying gains tax on up to $250,000 and Married Couples are exempt on up to $500,000 of Capital Gains IF you meet the following criteria:
1) The home has been a Primary Residence for at least 2 out of the last 5 Years.
2) You have not Sold or Exchanged another Home during the 2 years that precede this sale.

***As always, check with Your Certified Public Accountant to determine your exact Gains amount that must be paid***

For this example, let's say this home is your primary residence, you have lived in the home for the last 2 full years and you are single. You would be exempt from paying taxes on your Capital Gains amount of $40,000! These rules can amount to amazing savings, so be sure to take this into consideration when you are deciding if it is time to sell your home!