Are you thinking about listing a residential property for sale? Homeowners who are lucky enough to sell a property that has appreciated may have to pay capital gains tax. This payment can be significant but some individuals and couples may be able to potentially reduce their obligations to the IRS when making a profit from the sale of a home.
Understand capital gains tax before getting a home ready to go to market today.
Capital Gains Tax: The Basics
Not all homeowners who sell a home need to pay capital gains tax. Capital gains tax is generally obligatory for those homes or major assets sold which have appreciated, thereby profiting the owner. Both primary and secondary homes may be subject to this tax, as when the secondary or vacation home may be declared a primary home. It is best to speak to a tax accountant to learn more about whether or not the sale of a residential primary home or second home may warrant the full payment of capital gains tax. The seller's tax bracket may be a factor in determining the rate of taxation.
Can a Seller Be Exempted from Capital Gains Tax Payments?
For some individuals and couples, they may not have to pay all of the capital gains tax on the sale of an appreciated property. The Taxpayer Relief Act of 1997 created exemptions for individuals and couples. The $250,000/$500,000 Exemption allows an exemption for a single seller on up to $250,000 on the profit derived from the sale of a principal residence. The exemption increases to $500,000 for couples. If profit from a sale exceeds either of these amounts, a capital gains tax would need to be paid on the additional amount. It is not only single-family homes that may qualify, but also stock-cooperatives, apartments, condominiums and fixed mobile homes. The exemption is only applicable to homes used as a primary residence, and cannot be used toward the profits from the sale of a rental or investment property.
There is a "2 out of 5" year rule that applies in most situations. Under this rule, homeowners need to live at the residence for a minimum of 2 years out of 5 years before the sale of the home. Being aware of such specific requirements can help more homeowners take advantage of this exemption, living in the home for another year if necessary in order to qualify. Flexibility to this stipulation may apply if there are unforeseen circumstances or medical exemptions. However, additional documentation would be required. Full or partial exemptions may be possible if certain conditions are met by the seller.
What Needs to Be Done After Selling a Primary Residence?
Selling a home is not always a straight-forward process but after closing on a property a seller is responsible for completing Schedule D and declaring any profit. The profit will need to be reported as either a short-term gain or a long-term gain depending on the length of time one has owned the property. A tax accountant can clarify this further.
Capital Gains When Selling A Secondary Residence
Capital gains are paid on a secondary residence when it sells, but only on the profit made on the appreciation of the. The good news is that there are new exemptions for both single and married homeowners who are selling a secondary residence and the home has increased in value. Any gains under $250,000 for a single person and $500,000 for a married couple are not subject to capital gains tax. As long as the home was lived in two out of the last five years, the couple or individual doesn't pay capital gains tax on anything under the cap.
If the home appreciates more in value than the set cap, capital gains tax are only paid on the amount above and beyond the cap. However, if the home was not lived in for two of the last five years, homeowners are expected to foot the full tax bill.
It's most important to talk with a tax professional when it comes to investments and selling a secondary home. While a homeowner is going to be able to keep much of the capital gains without a tax penalty, it is always wise to talk with a tax professional to make sure the job is done correctly.
A Benefit for Home Sellers
Superior homeowners selling a home for the first time may not know about applicable exemptions to the capital gains tax and pay thousands more to the IRS than is necessary. Learning about applicable exemptions like the $250,000/$500,000 rule can help homeowners pocket more profit from the sale of a primary home. It is best to learn more about how to potentially reduce capital gains tax payment before selling a home as certain conditions and documents may be required in order to qualify for the exemption.