Real Estate Capital Gains When Selling Your Home

By
Real Estate Agent with RE/MAX Executive Realty 91362

As a Realtor working in Metrowest Massachusetts for the last twenty three years, it surprises me how often people do not realize the current tax laws regarding capital gains when selling their home.

The new capital gains tax law actually went into effect in 1997 and is known as the Taxpayer Relief Act of 1997.

The current capital gains tax law when selling your personal residence allows for an exclusion of up to $250,000 in profit if you are single and $500,000 if married. In order to be eligible you must have lived in your home for two of the last five years. Again it must be your personal residence and can not be an investment property.

You can use this capital gains exclusion as many times as you like as long as it meets the above criteria. As an example lets say you were fortunate to purchase your home for $400,000 and it is now worth $700,000. Your $300,000 in profit or gain would not be taxed.

So what happens if you are going to make more than $500,000 in profit? Under the current tax plan you would be taxed at a 20% capital gains tax rate on the amount over the $500,000 threshold.

As far as living in the home for two out of the last five years there are no hard and fast rules regarding this. You could have lived in the home the 1st year, rented it the next three, and lived in it again in the last year and you would be fine as far as the exclusion goes.

There is a new law that just went into effect as of January 1st 2009 that closes a tax loop hole in the Capital Gains law. The recently signed 2008 Housing and Economic Recovery act has placed new restrictions on wealthy home owners who own two or more homes and plan to hop from one home to another to avoid paying capital gains.

Some home owners have avoided paying the capital gains tax by selling their primary home, claiming a full tax exclusion and then moving to a second or third home that they have owned for some time, making it their primary residence and then turning around and selling the home paying little or no capital gains tax.

The new modification says that the gain may not be excluded for periods of "non qualified use", basically the period of time when the home was not used as the taxpayer's primary residence.

 

While being married does offer the benefit of a larger tax exclusion, couples also have some other considerations when it comes to determining whether the home sale is tax-free or not.

Under the law, either spouse can meet the ownership test. For example, the IRS says it's OK if you owned the home for the last two years, you get married and you decide you want to add your spouse to the title. In this case, lets say the marriage is a year old.                                                                                       

Since one of you owned the residence for the required time, as joint filers you have no problem meeting the ownership test even though your spouse wasn't an official owner for that long.

Both parties however must pass the use test. Each of the spouses must live in the residence for two years. One thing to note is that the shared use doesn't have to be while you file jointly. If you and your spouse shared the home for one and a half years before getting married and then six months as newlyweds, the IRS will allow you to claim the exemption. But if your spouse did not move in until the wedding day, you're out of tax-exclusion luck.

One other thing to keep in mind under this couple requirement is that if either spouse sold a home and used the exclusion within two years of the sale of any jointly-owned property, the couple can not claim the tax exclusion. This means if your new spouse sold their home a few months before the wedding, then you will have to wait two years after that property's sale date before you can sell  your shared marital residence tax-free.

Even if you don't meet all the home sale exclusion tests there are certain circumstances where you still may be eligible for a tax break. When you need to sell your home because a change in health or a long distance relocation, you may be be able to get a pro-rated tax deduction. If you pass the requirements of this kind of case, you would calculate the fractional time your were in the home. For example if you were in the home for half the time and were relocated to another state you would be able to claim 12 out of the 24 months of exclusion or half the amount of the exclusion ($125,000).

If you are in the armed services there is also a special provision regarding the capital gains law as well. A law instituted in 2003 now exempts military personnel from the two-year use requirement for up to 10 years, letting you qualify for the full exclusion whenever you must move to fulfill your service commitments.

The information contained here in is believed to be accurate, however every person's individual tax situation may be different, therefore before acting on the information contained herein, the reader is urged to consult a qualified tax accountant or attorney.

Home ownership certainly has tax advantages. When completing the purchase of a home there are other  deductions you need to remember.

See also:

Massachusetts Capital Gains Tax

Tax deductions to remember when getting a home loan.

_____________________________________________________________________________________________________

About the Author: The above information on Real Estate capital gains when selling your Massachusettsremax executive realty Hopkinton Massachusetts home was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. 

Have a home to sell in Metrowest Mass? I have a passion for Real Estate and love to share my marketing expertise! 

For Metrowest Massachusetts Real Estate and homes see Metrowest Mass Realtor. Want to have MLS access to beat other buyers to your dream home? Sign up with no obligation at my MLS Property Finder Site.

I service the following towns in Metrowest Massachusetts: Hopkinton, Milford, Upton, Southboro, Westboro, Ashland, Holliston, Mendon, Hopedale, Medway, Grafton, Northbridge, Uxbridge, Franklin, Douglas, and Framingham MA.

Click here to view Bill Gassett's Real Estate profile.

 

 

 

 

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Bill Gassett is a thirty-two year veteran to the real estate industry. He enjoys providing helpful information to buyers, sellers and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, National Association of Realtors, Inman News, Placester, RESAAS, Credit Sesame and others.

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Re-Blogged 6 times:

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Rainer
295,504
Stephen Kappre
KW Hometown - Mantua, NJ
Helping You Home

Good info - it reminds me why we pay good money for good tax advisors!

Jan 12, 2009 09:33 AM #31
Ambassador
458,881
Terrie Leighton
Ferrari-Lund Real Estate - Reno, NV
Reno Real Estate Agent ~ Selling Homes in Reno

Great information Bill! The comment from Lenn is terrific ... but hopefully we won't  always think it is a joke when talking about capital gains!

Good idea about adding the declaimer as well.

Jan 12, 2009 09:53 AM #32
Rainer
55,501
Kelsey Barklow
Hurd Realty - Johnson City, TN
423/948-9154

Thanks for this information. I had a couple of sellers ask me this question recently. I told them to talk to their accountants because I wasn't completely sure. Now I know.

Jan 12, 2009 10:07 AM #33
Rainmaker
1,043,346
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Richard - Hopefully the Capital tax gain law will not change as this is one of the better reasons why home ownership is better than renting.

Kelsey the basics of the capital gains law is pretty simple. It does get a little more complex when you are talking about a married couple and when exactly you become eligible for the tax exclusion.

Jan 12, 2009 10:31 AM #34
Rainmaker
205,005
Kent Anderson
Coldwell Banker Realty-Schweitzer Mountain, Sandpoint, Idaho - Sandpoint, ID
from Schweitzer to the Lake

Good info.  I feel like I could have explained most of this with a certain amount of authority to a client but it really helps to have it in writing to support what hangs dubiously in my gray matter.

Jan 12, 2009 10:48 AM #35
Rainmaker
662,049
Patricia Aulson
BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate - Exeter, NH
Realtor - Portsmouth NH Homes-Hampton NH Homes

Great blog, very informative for anyone to read.  Thank you for getting it out to us.

 

Patricia Aulson/  Portsmouth NH Real Estate

Jan 12, 2009 10:52 AM #36
Rainmaker
2,323,034
Charles Stallions
Charles Stallions Real Estate Services - Pensacola, FL
800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl.

Thanks for sharing I hadn't thought about the TRA for quite awhile. I always like refreshing up on these programs. You never know uh.

Jan 12, 2009 11:03 AM #37
Rainmaker
1,004,473
Karen Anne Stone
New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX
Fort Worth Real Estate

Bill:  Thanks so much for an excellent post.  Lots of very useful information... both for me and for my clients.  Thanks for sharing...

Jan 12, 2009 11:13 AM #38
Rainmaker
1,079,073
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Bill, this is an important post for consumers to understand. As Realtors, of course we aren't CPAs or loan officers, but as professionals, we do touch upon their areas in educating our buyers and sellers as to broad concepts and then they check with their CPA, etc., to verify their individual situation. This is part of how we add value to our clientele. I can't imagine knowing this and not sharing it with a Seller who was trying to make a financial decision about whether to sell or not.

Jan 12, 2009 01:17 PM #39
Rainmaker
131,417
Mike Henderson
Your complete source for buying HUD homes - Littleton, CO
HUD Home Hub - 303-949-5848

Good article.  If you are getting married and then starting to decide whether to file jointly or seperately, selling a home or not.  Use a little tax planning in addition to the wedding planning.

Jan 12, 2009 01:22 PM #40
Rainmaker
550,399
Lynda Eisenmann
Preferred Home Brokers - Brea, CA
Broker-Owner,CRS,CDPE,GRI,SRES, Brea,CA, Orange Co

Hi Bill,

Great information. I was not aware of the distinction between two individuals under the same roof and how it applies to occupancy for 2 years  vs. married for 2 years. Thanks!

Jan 12, 2009 01:26 PM #41
Ambassador
2,932,486
Margaret Rome, Baltimore Maryland
HomeRome Realty 410-530-2400 - Pikesville, MD
Sell Your Home With Margaret Rome

Bill,

Another well deserved featured post with good and timely information. Thanks for sharing.

Jan 12, 2009 02:23 PM #42
Ambassador
1,507,822
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

Too many people in this part of the world don't need to worry about this :raising one eyebrow:  Thanks for the most informative post :)

Jan 12, 2009 03:09 PM #43
Rainmaker
334,624
Jeff R. Geoghan
Coldwell Banker Residential Brokerage - Lancaster, PA
REALTOR, Marketing Manager

...And of course, you should consult a tax professional if you would like more information.

Good idea for a post!

Jan 12, 2009 03:25 PM #44
Ambassador
1,648,338
Jennifer Fivelsdal
JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571 - Rhinebeck, NY
Mid Hudson Valley real estate connection

Bill - This is a topic that is usually misunderstood.  You managed to provide a clear and understandable explanation which will be appreciated by many.

Jan 12, 2009 04:02 PM #45
Rainmaker
453,000
Eva Aliaga
Keller Williams Realty Boca Raton IdealFloridaLiving.com - Boca Raton, FL
Boca Raton & Delray Beach: SE Florida Real Estate

Bill, Great refresher info about the capital gains tax and bring this info to home owners, sadly many in this area can not use it.

Jan 12, 2009 04:32 PM #46
Ambassador
2,007,377
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

I found this as re-blog elsewhere and just wanted to drop by and let yon know that I think this is such important information for sellers to have and that it's nicely done.

Jan 12, 2009 06:45 PM #47
Rainmaker
83,622
Randall Sandin
Carolina One Real Estate - Charleston, SC
843-209-9667 - Search for Charleston SC Real Estate

hey Bill - excellent article and great info in simple terms which is what every one prefers, thanks

Jan 12, 2009 09:45 PM #48
Rainmaker
261,983
Mara Hawks
First Realty Auburn - Auburn, AL
Inactive-2012 REALTOR - Homes for Sale Auburn Real Estate, AL

This is such excellent info (can I re-blog?) I love how well you've explained it and organized it. Fantastic!

Jan 13, 2009 12:47 PM #49
Rainmaker
1,043,346
Bill Gassett
RE/MAX Executive Realty - Hopkinton, MA
Metrowest Massachusetts Real Estate

Thanks everyone for all your great comments about the capital gains tax laws!

Mara - Of course you can re-blog the post. It would be my honor!

Jan 14, 2009 09:38 AM #50
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