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Capital Gains

THINGS TO CONSIDER

Tax implications to consider if you are thinking about selling your home. The money you make on the sale of your home might be taxable.

It feels great to get a high price for the sale of your home, but the IRS may want a piece of the action. Capital gains on real estate are taxable sometimes. Here’s how you can minimize or even avoid a tax hit on the sale of your house.

How does a capital gains tax work?
The IRS and many states assess capital gains taxes on the difference between what you pay for an asset — your basis — and what you sell it for.

Capital gains taxes can apply to investments, such as stocks or bonds, and tangible assets like cars, boats and real estate.

The good news about capital gains on real estate is that the IRS typically allows you to exclude up to:

$250,000 of capital gains on real estate if you’re single.$500,000 of capital gains on real estate if you’re married and filing jointly. For example, if you bought a home 10 years ago for $200,000 and sold it today for $800,000, you’d make $600,000. If you’re married and filing jointly, $500,000 of that gain might not be subject to the capital gains tax (but $100,000 of the gain could be).

The bad news about capital gains on real estateYour $250,000 or $500,000 exclusion typically goes out the window, which means you pay tax on the whole gain, if any of these factors are true:

-The house wasn’t your principal residence.
-You owned the property for less than two years in the five-year period before you sold it.
-You didn’t live in the house for at least two years in the five-year period before you sold it. (People who are disabled, and people in the military, Foreign Service or intelligence community can get a break on this part, though; see IRS Publication 523 for details.)
-You already claimed the $250,000 or $500,000 exclusion on another home in the two-year period before the sale of this home.
-You bought the house through a like-kind exchange (basically swapping one investment property for another, also known as a 1031 exchange) in the past five years.
-You are subject to expatriate tax.

If it turns out that all or part of the money you made on the sale of your house is taxable, you need to figure out what capital gains tax rate applies.

Short-term capital gains tax rates typically apply if you owned the asset for less than a year. The rate is equal to your ordinary income tax rate, also known as your tax bracket. (What tax bracket am I in?)

Long-term capital gains tax rates typically apply if you owned the asset for more than a year. The rates are much less onerous; many people qualify for a 0% tax rate. Everybody else pays either 15% or 20%. It depends on your filing status and income.

How to avoid capital gains tax on a home sale:
Live in the house for at least two years. The two years don’t need to be consecutive. If you sell a house that you didn’t live in for at least two years, the gains can be taxable. Selling in less than a year is especially expensive because you could be subject to the short-term capital gains tax, which is higher than long-term capital gains tax, he says.

See whether you qualify for an exception:
If you have a taxable gain on the sale of your home, you might still be able to exclude some of it if you sold the house because of work, health or “an unforeseeable event,” according to the IRS. Check IRS Publication 523 for details. Keep the receipts for your home improvements. “The cost basis of your home not only includes what you paid to purchase it, but all of the improvements you’ve made over the years,”. When your cost basis is higher, your exposure to the capital gains tax is lower. Remodels, expansions, new windows, landscaping, fences, new driveways, air conditioning installs — they’re all examples of things that can cut your capital gains tax.

“Jen Schneider is the best real estate agent ever! She was recommended to us by some friends and we are so lucky we found her. She is totally available, nice, smart and real. I can’t imagine spending all that time house hunting with someone else. She will spend as much time with you as you want looking and is always available. In short, she rocks!”

COVERT PROPERTIES

“Jen Schneider is the best real estate agent ever! She was recommended to us by some friends and we are so lucky we found her. She is totally available, nice, smart and real. I can’t imagine spending all that time house hunting with someone else. She will spend as much time with you as you want looking and is always available. In short, she rocks!”

Heather & Josh Huntington

CALL US TODAY AT 949.395.1620 IF YOU ARE LOOKING TO BUY OR SELL A HOME IN ORANGE COUNTY.