Many homeowners don’t consider the tax impacts of selling a home prior to the sale. They’re often more concerned about getting a good price for the home, making a profit, and ending up with enough money to buy the new home they have their eye on. And this is all good until it’s time to do the taxes. That’s when most people learn about the capital gains tax – what it is and why they may have to pay it. And that’s not a pleasant surprise.
What is a Capital Gains Tax?
A capital gain is what happens when you sell an asset for more than you originally paid for it. The IRS assesses taxes on this additional amount because they consider it a source of income. A capital gains tax can apply not only to homes but to investments such as stocks or bonds and other tangible assets such as cars, boats, etc.
There are two types of capital gains that the IRS is concerned with:
- Short-term capital gains occur when you’ve owned an asset for a year or less.
- Long-term capital gains occur when you’ve owned an asset for more than a year.
Most homes fall into the long-term capital gains category.
Here’s the Good News
The IRS allows taxpayers to exclude certain capital gains from taxes if they meet the specified criteria. Here’s how it works.
If you’ve lived in the house as your principal residence for two of the past five years prior to the sale, you’re eligible for an exemption of up to $250,000 in capital gains if you’re single or $500,000 in capital gains if you’re married filing jointly. The two years do not have to be consecutive, but the home does have to be your primary residence for those two years.
When the Exemption Doesn’t Apply
If you’ve owned the property for less than two years, the capital gains tax exemption probably doesn’t apply, and you’ll have to pay taxes on the money you make on the sale over and above the original purchase price. There are other ways to get part of your profit to be considered tax-free, however. These include a change in employment status, change in health status, military deployment, and others. Talk to your accountant if you have questions about your status.
Another note: The exemption on capital gains does not apply to rental properties. If you intend to sell a rental property and want to minimize the tax implications of the sale, you need to convert the property to your primary residence for two years first. Then you can sell it and take advantage of the capital gains tax exemption.
Adams Accounting Solutions Has the Answers
If you’re contemplating the sale of a property, contact Adams Accounting Solutions first to talk through the tax ramifications – before you move forward with the sale. We can help you determine the best course of action and help you get the most from the sale of your home. Give us a call at 913-888-9100 for more information or to schedule an appointment.
