If your Grandma bought a house in 1975 for 25,000 and sold it in 2008 for $325,000 to move into a retirement home (where she would pay rent), assuming it was her principle residence (her only home) would she have to pay tax on the increase?

I'm just wondering how it works in the US.

Here, you don't have to pay any tax on any increase in one principle residence per family unit. Under the scenario above, we would pay no tax on the increase. If we had a cottage as well as a home, we would pay tax on any increase on the cottage once it was sold.

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I'm assuming that Grandma is single. In that case, she can exclude $250,000 of the gain. In your example, she paid $25,000 and sold for $325,000 so her gain would be $300,000 less the $250,000 for a net gain of $50,000.

A couple things to keep in mind.....if Grandma made any improvements to the house since she bought it, this would add to the $25,000 cost and reduce the gain. Also, if she owned this house with Grandpa and Grandpa died during the ownership, she would receive his "half" of the house at the value at his death. This would reduce the gain even more.

The bottom line: if you are selling a house and you have a gain, see a competent tax advsior to find ways to lower the gain.

Wow, thanks for the informative answer! $250,000 is much better than I thought. We probably have something similar but I'm not sure of the specifics.

Does that mean that people should keep their receipts when they do upgrades to prove how much money they put into their house? Just wondering how it works...

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Yes, keep track of what you spend on upgrades!

I am putting together a binder for our new home. It will detail brands, contractors, dates of service, recommended service schedules, warranties and such. Some things are just maintenance that I want to keep track of and some things are upgrades and add to the basis of the house.