So often in dealing with other real estate agents in Central Virginia, I find that they are unaware of the rules of the income tax regulations for the exclusion of capital gains for their clients who are selling their homes.
So many people think that you have to buy a bigger home to exclude the gain from the previous home....WRONG! Old law. This was disposed of in 1997.
Others think that you must be 55 or older to get an exclusion...WRONG! Old law. Again gone in 1997.
In general, the law currently states that an individual may exclude up to $250,000 (and a married couple may exclude up to $500,000) in capital gains on the sale of their principal residence.
Before we go further, we need some definitions...
What is a principal residence? The IRS does not define this, but definitely use some common sense here. You will have to prove that you lived there without question if you are asked be the IRS. You may be able to do this by showing where you receive your mail (copies of bills), where you are registered to vote, where your car is registered, where you file state taxes, etc. Obviously, if your car is registered or you are registered to vote in North Dakota, and the home is in Florida, it's not gonna work.
What is capital gain? Basically, what you sold the house for less what you paid for it, less improvements and selling expenses.
Now that we got those definitions out of the way, let's look at the stipulations needed to take advantage of this exclusion.
There are three requirements:
1 - Ownership - Must have owned it for at least 2 out of the last 5 years before the sale.
2 - Use - Must have used it as a principal residence for at least 2 out of the last 5 years before the sale.
3 - One Sale in Two Years - Can only do this exclusion one time every two years. HUGE! They are telling you that you can move every two years and pocket the money without any tax consequences.
Those who do not meet the 2 out of 5 years test, can possibly get a reduced exclusion if they meet certain requirements. Check with your CPA.
If you are looking to buy or sell real estate in Central Virginia, call Dale Campbell, CPA, Cloverleaf Realty, 804-516-3280.
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