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  • Writer's pictureJosh Taylor

Capital Gains Tax 101: Essential Tips for Home Owners

When selling a property, capital gains taxes can significantly impact your financial returns. However, the good news is that there are strategies you can employ to minimize or even exclude these taxes. In this blog post, I will provide you with essential information and guidance to help you navigate the complexities of capital gains taxes on real estate transactions.

Excluding Capital Gains on Real Estate Sales: IRS offers a rule that allows homeowners to exclude a portion of their gain from the sale of their primary residence. Here's what you need to know:

Exclusion Limits:

  • If you're single, you may exclude up to $250,000 of capital gains on real estate.

  • For married couples filing jointly, the exclusion limit increases to $500,000.

Let's consider an example: Suppose you purchased a home ten years ago for $200,000 and now plan to sell it for $800,000. The net profit from the sale would be $600,000. If you're married and filing jointly, you could potentially exclude $500,000 of that gain from capital gains taxes, leaving only $100,000 subject to taxation.

Determining Tax Liability: To assess whether capital gains taxes apply to your real estate transaction, consider the following factors:

Principal Residence:

  • If the property being sold is not your principal residence, the entire gain may be subject to capital gains tax.

Ownership Duration:

  • If you owned the property for less than two years within the five-year period leading up to the sale, or if you didn't reside in the property for at least two years during that period, capital gains taxes may apply.

  • Exceptions exist for individuals with disabilities, members of the military, the Foreign Service, or the intelligence community. You can find detailed information in IRS Publication 523.

Previous Exclusion:

  • If you've already claimed the $250,000 or $500,000 exclusion on another home sale within the past two years, capital gains taxes may be triggered.

Strategies to Minimize Capital Gains Taxes: To help you minimize your capital gains tax liability, consider the following strategies:

Residency Requirement:

  • Live in the property for at least two years to qualify for the exclusion of capital gains taxes.

  • Remember, the two years don't have to be consecutive. However, if you're involved in house-flipping, be cautious, as selling a property within a year may result in higher short-term capital gains tax rates.

Exception Qualification:

  • Explore whether you qualify for exceptions to the capital gains tax by selling your home due to work, health issues, or "unforeseeable events" as defined by the IRS.

  • Reference IRS Publication 523 for specific details and eligibility criteria.

Maintain Home Improvement Receipts:

  • Retain receipts for any home improvements made over the years.

  • The cost basis of your property includes both the purchase price and the value of improvements.

  • Higher cost basis can help lower your exposure to capital gains taxes.

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