Many homeowners are not aware that when you sell your primary residence you can avoid paying Capital Gains taxes.
Now I’m not a tax expert, so you will need to consult your tax advisor, accountant, or lawyer on how this information applies to your specific situation.
However, here’s how some notable authorities have answered this question:
Carrie Schwab-Pomerantz, CFP via Schwab.com
President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
In response to a question from one of her readers Carrie responds:
Great question—and good you’re asking it now. That’s because, while there are generous exclusions allowed when it comes to capital gains on the sale of a home, timing is crucial and the clock is ticking.
Under current laws, if you sell your principal home and make a profit, you can exclude $250,000 of that profit from your taxable income. And that’s just the exclusion for an individual. Married couples can exclude up to $500,000 (if both spouses each meet the ownership and use tests below). So, depending on how much of a profit you make on the sale, you and your husband could potentially have no capital gains tax bill at all.
The article goes on to state some of the ‘ownership rules’ set down by the I.R.S code:
- “You have to have owned the house for two years.
- You have to have lived in the house as your principal residence for two out of the last five years, ending on the date of the sale.”
Kay Bell via BankRate.com
What’s the best tax break available to Jane and John Q. Public? If they’re homeowners, it’s selling their house.
Homeowners already know the many tax breaks that Uncle Sam offers, most notably mortgage interest and property tax deductions. Well, he also has good tax news for home sellers: Most of them won’t owe the Internal Revenue Service a single dime.
When you sell your primary residence, you can make up to $250,000 in profit if you’re a single owner, twice that if you’re married, and not owe any capital gains taxes.
“Most people are not going to have a tax obligation unless their gain is huge,” says Robert Trinz, senior analyst with Thomson Reuters Checkpoint.
Some sellers are surprised by this break, especially if they’ve been in their homes for a while. That’s because before May 7, 1997, the only way you could avoid paying taxes on your home-sale profit was to use the money to buy another, more-expensive house within 2 years. Sellers age 55 or older had one other option. They could take a once-in-a-lifetime tax exemption of up to $125,000 in profits. And in all instances, there was Form 2119 to fill out to show that you followed the rules.
But when the Taxpayer Relief Act of 1997 became law, the home-sale tax burden eased for millions of residential taxpayers. The rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts.
“There is some logic to this law change because most people under the prior rules didn’t recognize a taxable gain, because they rolled it over into another residence,” says Trinz. “The change essentially makes it easier to dispose of your residence.”
The article goes on to share some of the requirements and you can read more at the following link.
Read more: BankRate.com
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So you may be wondering how do I calculate the the Gain of my home sale.
Stephen Fishman J.D via Legal Help site NOLO.com
First, How Much Is Your Gain?
“Many people mistakenly believe that their gain is simply the profit on the sale (“We bought it for $100,000 and sold it for $650,000, so that’s a $550,000 gain, and we’re $50,000 over the exclusion, right?”). It’s not so simple — a good thing, since the fine print can work to your benefit in such instances.
Your gain is actually your home’s selling price, minus deductible closing costs, selling costs, and your tax basis in the property. (Your basis is the original purchase price, plus purchase expenses, plus the cost of capital improvements, minus any depreciation and minus any casualty losses or insurance payments.)”
In this great article Mr. Fishman goes on to give a simple example of how this might look for a typical homeowner.
“So, for example, if you and your spouse bought a house for $100,000 and sold for $650,000, but you’d added $20,000 in home improvements, spent $5,000 fixing the place up for the sale, and paid the real estate brokers at least $25,000, the exclusion plus those costs would mean you’d owe no capital gains tax at all.
For more information, see IRS Publication 551, Basis of Assets, and look for the section on real property.”
You can read Mr. Fishmans’ entire article at NOLO.com
