Did you know that the money you make on selling your house is TAXABLE?
The feeling of knowing you were able to sell your house at a great price is amazing.. but finding out that IRS might get a part of it is disheartening! This is because capital gains on real estate are taxable sometimes.
There are ways to avoid or minimize taxes..
The capital gains tax is assessed by IRS and many states by the difference between what you pay for an asset (your basis) and what you sell it for. This can also apply to investments, like bonds, stocks or tangible assets like real estate, cars or boats.
CAPITAL GAINS ON REAL ESTATE
Normally, IRS allows up to $250,000 exclusions of capital gains if you’re single and up to $500,000 if you’re married and filing jointly.
For example, if you bought a home 15 years ago for $300,000 and sold it today for $900,000, you’d make $600,000. If you are married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax but the $100,000 of the gain could be.
THE CONS ON CAPITAL GAINS ON REAL ESTATE
You have to pay tax on the whole gain IF:
- The house you are selling was not your principal residence – To get around the capital gains tax, you need to live in your primary residence at least two of the five years before you sell it. Once you’ve lived in the property for at least 2 years, you’d reach capital gains tax exemption.
- You did not live in the house for at least 2 years in the five-year time before you sold it. (For exemptions on this, see IRS Publication 523)
- You already claimed a previous exclusion on another home in the 2-year period before the sale of the current home you are selling.
- The house was bought in swapping one investment property for another (1031 exchange) in the past 5 years.
- You are subject to expatriate tax.
If in the event that all or a big part of the money you made on the sale of your house is TAXABLE, you need to understand what capital gains tax rate applies.
- SHORT TERM – applies when you owned the home for less than a year. The tax rate is equal to your ordinary income tax rate.
- LONG TERM – applies if you owned the home for more than a year. The rates are not that heavy. Most of the time, people qualify for a 0% tax rate.
HOW TO AVOID CAPITAL GAINS TAX
- MAKE SURE YOU LIVED IN THAT HOUSE FOR AT LEAST TWO YEARS.
- CHECK IF YOU QUALIFY FOR AN EXCEPTION.
- KEEP THE RECEIPTS FOR YOUR HOME IMPROVEMENTS.