Have you ever questioned whether you REALLY wanted to sell an asset, only because of the capital gains tax you knew would be levied? If so, you’re not alone. But be not afraid, capital gains tax is an inevitable fact of life… when you sell a property, you pay
taxes on your gain. Your “gain” will be the difference between what you paid for the property, and the amount you receive when you sell. As always, the IRS wants a slice of that profit, and that isn’t ever going to change.
But take solace in the fact that most of the gain achieved when you sell your home is excluded from capital gains tax. A single seller gets to keep the first $250,000 tax-free when he or she sells a primary residence; a married couple filing a joint return can walk away with up to $500,000 free from tax. The key words here are “primary residence.”
Second homes, vacation homes, and investment properties don’t qualify for that tax exemption.
Netting High Profits
If the market has moved dramatically during ownership, and you wind up netting a profit higher than the tax exemption limits, then you may need to pay capital gains tax—this often happens to people who have owned their homes for decades in areas with
skyrocketing prices.
Keep Detailed Records
Such long-term owners, however, have usually invested large sums of money into improvements over those decades. As always, keep detailed records, and receipts for all add-ons to your home that increased its value over the years… the dreaded tax man
will need evidence that your cost basis is actually higher than the original purchase price of the home.
For example, if you add a deck, the cost of that improvement will increase the “price you paid for your home.” Rinse, and repeat for all such improvements made during ownership. Once all of those additional costs are factored in, you may well wind up with
a “cost basis” that brings you, or you and your significant other within that $500,000 “free of tax” gain threshold. For more details on capital gains, visit the IRS Website.
Check back for Part Two of this BLOG POST… to learn what you need to know about Capital Gains Tax!
For more answers to your real estate questions, contact Karen and she will be happy to share her wealth of knowledge as an award-winning realtor!
