Capital Gains sounds like a scary inevitable cost when selling your home at a profit. BUT once you understand how it’s computed and who qualifies for exclusions you’ll see you can most likely breathe easy. Most people DO qualify for the exemption which allows for up to $250,000 per individual or $500,000 per couple.
What are Capital Gains?
You can determine the capital gain on your home by subtracting applicable costs of selling your home (ie: commissions, advertising) plus the cost of any qualifying home improvements (you can find specific details on the IRS website) from the original purchase price of your home.
Ex: Original Purchase Price = $200,000 + $25000 Costs = Cost Basis of $225,000 Selling Price = $325,000 – $6500 Commission (You saved by selling BuyOwner!) so you receive $318,500 – $225,000 = $93,000 in Capital Gains. You will not pay tax on this gain if you meet the exemption requirements noted below.
Qualifications for Capital Gains Exemption?
The following requirements must be met in order to qualify for the capital gain exclusion when selling your home:
- You must have owned your home for at least 2 years.
- The home must have served as your main personal residence for at least 2 years.
- During the 2 year period ending on the date of sale (Note: If you’re close to this date, negotiate your closing to ensure it occurs after the 2 yr qualification has been met), you didn’t exclude gains from the sale of any other home.
YAY: You can use the capital gain exclusion over and over again as long as you meet the requirements.
BOO: If you take a loss from your home sale, you do NOT get to take the loss as a tax deduction.
NOTE: To Always ensure that you are receiving max tax benefits, consult your tax accountant or review thoroughly the applicable information on IRS.gov