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Capital Gains

By
Real Estate Agent with Coldwell Banker

Capital Gains Tax on the Sale of Your Home

Capital gains tax is a tax on investments.  The gain is the profit realized upon selling an investment like a house.

I hear a lot of real estate agents make incorrect statements about what capital gains tax may be due upon selling a principal residence.  The agents will cite the old "rollover residency replacement rule," which allowed a seller to defer paying taxes on all the profits from a home by purchasing a new home of equal or greater value.

In 1997, the Taxpayer Relief Act substantially changed the rules on the capital gains exemption.  Married couples who sell their homes can keep up to $500,000 in profits tax free, and single filers can keep up to $250,000.  These exemptions apply regardless of whether they buy another home.  To qualify for the exemption, the home must have been a principal residence for two of the past five years.  Also, homeowners may only claim the exclusion every two years.

Any sale that either does not fall in the above category (e.g. vacation home) or a sale exceeds the limit amounts ($500,000; $250,000 based on purchase price, not actual gain) will be reported to the IRS on Form 1099-S by the title company.  The IRS will then reconcile the Form 1099-S to the taxpayer's final tax return.

When the sale of the house exceeds $500,000 for married couples or $250,000 for single filers, and a 1099-S is issued, I also hear agents say "Oh don't worry.  You can roll that gain into your new house."  So essentially, this statement mixes the two capital gains rules -- the old and the new.  My understanding is that the old "rollover residency replacement" rule was repealed.  First, real agents should not be making any statements that indicate that sellers may not have to pay a tax. Any discussion with sellers about capital gains tax or other taxes should be prefaced with the statement that sellers should check with their tax/accounting advisors.  Second, this "new" rule has been around for 10 years now.  It's about time we stopped hearing about the "old" rule.  Any comments?

Comments (1)

Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

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Jun 18, 2015 11:18 AM