Most homeowners are aware of the basics regarding capital gains taxes and selling their home but some of the details can get a bit murky. The following is a very simplistic outline of the current rules related to capital gains. It is not meant to be comprehensive. Always consult a tax specialist before you decide to sell your residential property so you are clear on what your tax obligations may be.
- If you have owned and lived in your home as a primary residence for two of the last five years your gain is determined by taking your home's selling price and deducting closing costs, selling costs and the basis (original price and the cost of all documented improvements) of your home from that amount. The remainder is your gain.
- Once you determine the gain, the tax code allows you to exclude from taxation $250,000 for an individual or $500,000 for a married couple. Anything above that is taxed as a long-term capital gain. Under the new tax laws there three rates - zero, 15 % and 20 % depending on your income. Marco Argento wrote an good article in Bankrate on long-term capital gains.
- What about selling a home that was your primary residence but was turned into a rental when you bought and moved into a new home six years ago? This is where it gets tricky - you must have had the home as your primary resident for two of the five years. If you haven't you don't qualify for the exemption and you are taxed on the entire gain.
The IRS has a pamphlet to help sort out the murky areas of which there are many not discussed above. Click here to view the latest update of IRS Publication 523.
