What Home Sellers Need to Know About Capital Gains
When anyone sells a property, making a profit is the most desirable outcome—for both the seller and the Internal Revenue Service, who considers home sale profits above the buying price a taxable capital gain. What does that mean for sellers? It means that the profit earned from selling a home is eligible to be taxed, just like a salary and other forms of income. Keep reading to learn what impact capital gains might have on your tax bill.
The Art of Calculating the Basis of Capital Gains
The term "basis" is the foundation of the IRS's determination of what sellers will owe concerning taxable gains. This is essentially the calculation of how much one's asset initially costs, minus depreciation and out-of-pocket expenses during the period of ownership. These types of capital gains deductions can include:
- Additional Fees During Acquisition
- Sales & Excise Taxes
- High-ROI Home Improvements
- Costly Repairs
- Building Additions
When the sale is completed that exceeds the basis calculation, and there is a capital gain on the property. While most who have owned a home for an extended period can report their home exempt after depreciation and these other factors, any profits must be noted on the following year's income tax declaration.
Capital Gains When Selling a Home
Investing in real estate is often one of the most significant purchases a person makes in their lifetime. If the home is sold during a hot real estate market, the owners might see a nice sum concerning capital gains. That being said, particular tax codes might allow a seller to exclude these gains, but only under these set of circumstances.
- The home must be owned by the same seller and be utilized as their primary residence.
- The sellers must not have taken an exclusion for capital gains on a home sale in the two years previous to the home sale.
- Sellers are within a lower tax bracket than the average homeowner.
Time of Ownership and Capital Gains
The time of ownership is pivotal in determining the calculation of capital gains when selling. Should some major issue arise that forces one to sell before owning the home for less than two years, a few additional costs can be expected. This is because of the difference in the definition of a "long-term gain" versus a "short-term gain."
To qualify for a long-term gain exemption, one should own the home for two years or longer. The home must be utilized as the primary and principal residence where the owners live. Anyone selling less in less than that period with a home that has a profit margin will need to be prepared to have that income considered as a short-term taxable gain.
However, owners don't have to spend every moment in the home to be considered a primary residence. A month or two away a year doesn't disqualify owners from this exemption, but being away for longer than six months consecutively can undoubtedly be a disqualifying situation. Yet, owners with other residences that they may occupy as vacation homes for a longer duration are likely to find that they are disqualified. Another aspect to consider is that for a principal residence with one owner, the maximum tax exclusion is $250,000, but married couples can take up to a $500,000 exclusion.
How to Offset Capital Gains With Losses
A property sold at a price lower than the buying cost might be considered a capital loss. Yet, homes are a unique scenario that might, in some instances, will be deemed to be a taxable loss, which withholds specific tax exclusions. Some of these situations include:
- Buyers who have made stock investments have lost financial returns.
- Homes sold at a value less than the investment price.
- Realized, unrealized losses and recognizable losses in the property for the foreseeable future.
Research Capital Gains Taxes Before Selling a Home
Selling a home is a huge move that shouldn't be approached without the assistance of a real estate professional. Be sure to seek their valuable advice before selling your home to avoid excessive taxes on capital gain returns.