Tips for Taxes When Selling Your Home
Before Congress passed the Taxpayer Relief Act of 1997, you basically had two choices when you made money on the sale of your house: Pay significant capital gains taxes on the profits, or buy a house with greater value within two years. Only if you were 55 could you exclude a certain amount of profit and then, only once in your lifetime.
No more. Now virtually all sellers (except those at the highest end market) can keep any profits they make on the sale of a house with negligible tax consequences – making homeownership a potentially lucrative long term savings vehicle.
Understanding Capital Gain.
For home sellers, capital gain is the difference between what you pay for a house and what you sell it for, minus the cost of any capital improvements. Capital improvements are home improvements that change the structure or livability of your home, such as an added room or remodeled kitchen.
Today’s tax rules allow the following:
- Married Couples or Co-Owners who file taxes jointly may keep $500,000 in profits tax free on the sale of a home they have owned and lived in for 2 of the past 5 years. Anything above that is taxed at 20%.
- Single Homeowners may keep $250,000 in profits tax free on the sale of a home they have owned and lived in for 2 of the past 5 years. Anything above that amount is taxed at 20%.
- Rental Property Owners may defer some capital gains tax if they purchase another rental property and qualify for a 1031 exchange, but not if they buy a personal residence.
Essentially, you are free to sell a residence every 2 years and keep the profits. If you own and occupy your house less than the 2 years before you sell, you can still qualify for a prorated exclusion from capital gains if you are selling because of a job transfer or health problems.
Congress is always changing the laws. Always consult your tax advisor first.
