Capital Gain Taxes on Sale of Your Home

While most people may be aware of the of the $250,000 exclusions in  capital gain taxes on the sale of homes, $500,000 if file joint returns, but there is more to this law  than those two numbers.   Knowing the qualifying factors and limitations of the law may become beneficial to homeowners planning to sell their homes.

• Qualifying Homes for Exclusion of Capital Gain Taxes

The exclusion for capital gain tax applies only to the primary residence.  If there are more than one home, the homeowner could designate only the residence that they truly live in as their primary residence.  The IRS guidelines are strictly enforced when it comes to designating such properties.  Some of the rules include the place where homeowner works, vote and spend most of their time during a calendar year.

• Residency Duration

The homeowners have to live in their residence at least 2 of the last 5 years.  The 24 months period is not concurrently, and could be broken into segments.

•  Homeownership Duration

Same as the Residency Duration, the homeowner must own the home for at least 24 months during the past 5 years.

• Maximum Duration and Unforeseen Circumstances

The maximum duration of homeownership and residency do not apply to unforeseen circumstances such as death, divorce, change of job to over 50 miles and serious health issues.

• Maximum Deductions Could Be Less Than $250,000 and $500,000

For homeowners who have lived in their primary residence for less than 24 months may qualify for capital gain tax exemption, but the amount of the maximum deductions may be less than $250,000 or $500,000.  The total amount of the deduction is prorated only for homeowners who have to sell their homes under some unforeseen circumstances.  For example, if a couple who file joint return taxes are forced to sell their property after 1 year of ownership due to unforeseen circumstances will qualify for half of the $500,000 capital gain exemption, or $250,000 instead of the $500,000

• Married Couple Deductions and Ownership Rules

The $500,000 deduction for married couples also falls under the 24 months out of past 5 years ownership and residency restrictions.  The residency rule applies to both spouses but the ownership does not.  Only one spouse could own the home but both must meet the occupancy period threshold.

• Lowering Capital Gain Taxes Through Deductions

Not all sales of properties qualify for the $250,000 or $500,000 exemptions on capital gain taxes, but this doesn’t mean there are no other deductions available to reduce the amount of capital gain taxes.  Generally, most expenses occurred in selling a home are deductible from the total capital gain.  To reach the net capital gain, the home sellers could deduct the closing costs, commissions, advertising expenses as well as the costs associated with improving or remodeling the home.

For Example, If a homeowner has a capital gain of $300,000, but has spent $30,000 in kitchen remodeling, $20,000 in new roof and $5,000 in new A/C and a total of $35,0000 in commission and closing costs, he has occurred $90,000 in total expenses, which could be deducted from his capital gain.  In this case, the homeowner capital gain is $300,000 gain – $90,000 Expenses= $210,000.

For professional advice, it is always best to speak with your Accountant on these matters.