Capital Gains on the Sale of a Home
When considering the sell your home, everyone wants to find out how much money they will make at closing or have to bring to the closing table. If you are lucky enough to be a seller that is making money you must consider if you will have to pay capital gains taxes on the sale. This is a topic that hasn’t come up much in recent years with property values declining but some sellers are feeling good again.
There is a huge incentive in real estate that allows you to exclude $250,000 in profit (individual) or $500,000 in profit (married). To be eligible for exclusion from having to pay capital gains, you must have lived in the home as your principal residence 24 months out of the last 5 years.
If you are considering when to sell your home and you know that you will make profit on it, but you’re not quite to that 24 month mark, you may want to consider holding until the two year mark.
If you lived in your home less than 24 months, you still may be able to exclude a portion of the exclusion amount.
The amount an investor is taxed depends on both his or her tax bracket and the amount of time the investment was held before being sold.
Short-term capital gainsare taxed at the investor's ordinary income tax rate, and are defined as investments held for a year or less before being sold.
Long-term capital gains, which apply to assets held for more than one year, are taxed at a lower rate than short-term gains. In 2003, this rate was reduced to 15% and to 5% for individuals in the lowest two income tax brackets. These reduced tax rates were passed with a sunset provision and are effective through 2010; if they are not extended before that time, they will expire and revert to the rates in effect before 2003, which were 20%!! There could be a flood of sellers who will try to avoid this tax jump.
According to the IRS, principal residence exclusions are allowed for certain “unforeseen circumstances“, including:
- death,
- divorce or legal separation,
- becoming eligible for unemployment compensation,
- a change in employment that leaves the taxpayer unable to pay the mortgage or reasonable basic living expenses,
- multiple births resulting from the same pregnancy,
- damage to the residence resulting from a natural or man-made disaster, or an act of war or terrorism, and
- Condemnation, seizure or other involuntary conversion of the property.
If you need a professional to discuss tax law and your personal situation we have two great CPA’s that specialize in Real Estate tax law. Send an email or call and we will get you their contact information.
- Steven
1-888-506-2234
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