Some homeowners must pay capital gains taxes when they sell their home. Capital gains are taxes on profits made from selling an investment. Capital gains taxes apply to the sale of a primary residence or vacation home. Some homeowners must pay capital gains, others do not. Knowing the circumstances under which capital gains are applied and how to avoid paying capital gains can help homeowners save their money when they buy a property.
When Do Capital Gains Taxes Apply to A Real Estate Sale?
Homeowners who are selling their primary residence are allowed to make a modest profit (up to $250,000) on the sale of their home without paying capital gains taxes. For married couples, the limit is $500,000. If the homeowner makes over $250,000 (or $500,000, depending) on the sale of their primary residence, then they usually pay capital gains taxes.
This tax exclusion usually does not apply if the homeowner owned the property for less than two years before selling, or if the homeowner did not live in the house for at least two years. The homeowner also cannot take advantage of this tax exclusion if he or she is subject to the expatriate tax, or if the homeowner bought the house as part of a like-kind exchange.
The amount of money that a homeowner pays for capital gains taxes depends on how long the house was owned by the homeowner. The tax rate is lower for homeowners who owned their house for a long time.
Do Capital Gains Taxes Apply to Vacation Home Sales?
Capital gains taxes also apply to homeowners who sell their vacation property. Unlike with the sale of the primary residence, homeowners who sell their vacation property are, in most cases, subject to capital gains taxes no matter how little profit they make.
How Are Profits On a Home Sale Calculated?
Imagine a person buys a home for $50,000, and after thirty years of homeownership, the person sells the house for $350,000. The profits on the sale of the home are calculated like so: $350,000 - $50,000 = $300,000. The first $250,000 in profits are tax-free, so the homeowner must pay taxes on $50,000.
What Counts As A Primary Residence?
A primary residence is the home that the owner lives in for the majority of the year. A primary residence is usually within commuting distance of their work and is also the place they list on official documents, like their tax return.
How Can A Homeowner Avoid Capital Gains Taxes?
If the homeowner is selling their home because of health problems, job issues or another set of unforeseen circumstances, the homeowner may ask for an exception to the capital gains tax.
In addition, homeowners can also reduce the amount they own in capital gains taxes by keeping their receipts from home improvement projects. The amount of home improvements is then added to the base price of the home when calculating the profit. For example: a homeowner buys primary residence for $150,000, and makes $50,000 worth of improvements. The new adjusted basis for the home is now $200,000. After 30 years, the homeowner sells their Parkville home for $450,000. Since the $50,000 in improvements will be added to the base price of the home, the homeowner's profit is $250,000. As a result, the homeowner will not have to pay capital gains.
Who Can You Turn To With Questions?
If you're a homeowner who has questions about capital gains, talk to a financial or tax advisor before selling your home. A qualified financial advisor can help you sell your home in the most profitable way possible.