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Will I Owe Taxes?…
Capital gains home-sale tax break
a boon for owners:
When you sell your primary residence, you can make up to
$250,000 in profit if you're a single owner, twice that if
you're married, and not owe any capital gains taxes thanks to
the Tax Relief Act of 1997 that became law on May 7, 1997. This
exemption replaced the rollover or an once-in-a-lifetime option
that was in place until then.
Some requirements
must still be met:
First, the property you’re selling must be your principal
residence. That means you live in it. The tax break doesn’t
apply to a house or other property that you have solely for an
investment. In those cases you may be able to apply the Tax
Deferred 1031 – Exchange (call us for more details).
You can, however, turn a rental house into your primary
residence, making the sale of it eligible for the exclusion.
This is accomplished when you meet the IRS use and ownership
tests: You own and live in the home for two out of the five
years before the sale.
Special rules for
married couples:
While a husband and wife get double the exclusion of single home
sellers, couples also have some additional considerations when
it comes to determining whether their sale is tax-free.
Either spouse can meet the ownership test. For example, the IRS
says it's OK if you owned the home for the last two years, but
you just added your new husband to the title when you got
married six months ago. Since you owned the residence for the
requisite time, as joint filers you have no problem meeting the
ownership test even though your husband wasn't an official owner
for that long.
However, both husband and wife must pass the use test; that is,
each must live in the residence for two years. But the shared
use doesn't have to be while you file jointly. If you and your
now-husband shared the home for 1½ years before tying the knot
and then six months as newlyweds, the IRS will allow you to
claim the exemption. But if he didn't move in until the wedding
day, you're out of tax-exclusion luck.
Also under this couple requirement, if either spouse sold a home
and used the exclusion within two years of the sale of any
jointly-owned property, the couple can't claim the exclusion.
That means if your new husband sold his townhouse a month before
the wedding, then you'll have to wait two years after that
property's sale date before you can dispose of your shared
marital residence tax-free.
Figuring the
correct exclusion amount:
As a seller, you naturally focus on how much you got for your
house. That is an important number, but not the only one you'll
need when it comes to figuring whether you'll owe taxes on the
sale.
It's your gain, or profit, that determines the size or lack of a
tax bill. In fact, you can sell your house for $1 million and
still not owe Uncle Sam as long as the profit portion was not
more than $250,000 or $500,000, depending on your filing status.
If you can exclude all the gain, then you owe no taxes.
To arrive at your gain amount, you first must establish your
basis in the home. For most people this is what you paid for the
residence and all capital improvements you've made, such as
adding a room or finishing a basement. Then you compare that
basis amount to what you get from the sale, less your
commissions and other expenses. When you subtract your cost
basis in the residence, this will give you the amount of gain
(or profit) on the sale.
Since everyone’s real estate transaction and tax situation is
different, we suggest you talk to your tax adviser for complete
information on the “Capital Gains Tax Exemption” and how it
applies to you.
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