Selling your home can create a tax liability for you if you don’t consider the best way to handle capital gains from the sale. Although not applicable to everyone, if you have owned your home for a long time and accrued a great deal of equity, capital gains may apply to your sale but you may not have a tax liability with which to be concerned. You can easily calculate your tax liability and know before the sale if you will have a tax for capital gains, or not. Following are five capital gains tax myths, debunked.
1. Profit Taxed as Capital Gains?
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Profit on your home can be taxed as capital gains but only after you reach a certain profit threshold. Â A single owner can make capital gains profits of up to $250,000 and, $500,000 for a couple before they must pay capital gains tax. Knowing this will give you a clearer idea of what you liabilities are after the sale of your home and whether or not capital gains will affect you.
Prior to 1997, the exemption was a once in a lifetime $125,000. When the Taxpayer Relief act of 1997 became law millions of home sellers benefited from the new rules. You could now take any profits from the sale of your home and it was no longer necessary to reinvest in a new home. This small measure gave retirees a viable way to downsize and sock a few dollars away, at the same time, without their funds being eroded by taxes because the beauty of the rule is that they don’t have to reinvest the profit in a new home.
2. Is a New Home Exempt?
This can be tricky. If you have lived in the home for six months and verify residency there may not be any tax on capital gains from the sale. On the other hand, if you have just built the home, never occupied it and the time rule doesn’t fit your timeline, you will likely have a tax liability on capital gains from the sale of the new home. The occupancy rule surrounding real estate transactions prohibits investors from using their primary residence a investment property, although some home buyers may find an advantage to buying, fixing up and living in a for the allotted amount of time it takes to establish time in residence for capital gains exemptions.
If it is at all possible, it will be better for you to occupy a new home for a short period before selling. If you are in the business of building a home a year and selling it would be best for you to use a 1031 exchange for investment property. This will allow you to avoid taxes on capital gains of the sale of an investment property an enable you to invest all or some of your profits into a new residential property that is used for investment purposes.
3. Must You Live in the Home?
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This is true but there is a criterion that doesn’t require full time occupancy. If you have lived in your home for two of the last five years then you are eligible for a portion of the exclusion if exceed the threshold of the exemption for a single person or couple. This gives you the flexibility to rent your home for a couple of years but you will still have the benefit of the capital gains tax exemption when you do sell.
4. Is Capital Gains Tax only for the Wealthy?
One of the biggest capital gains myths is that you must be wealthy to be liable for capital gains tax. If you and your partner bought a home in 1986, for $100,000 and it is now worth $650,000 you have gained $550,000 and will owe capital gains tax on $50,000. So no, capital gains tax is for not only the wealthy and you need to be aware of your tax liabilities when you are selling your home. The amount you save, will better serve you being spent on your new home or your retirement. So, no, capital gains taxes are not only for the wealthy and if you are not careful when selling your primary residence you could be liable for thousands of dollars in capital gains taxes.
5. Should I Be Aware of My Profit Margin?
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Whether you are selling to downsize for retirement or because you want a new home, knowing your profit and tax liability will help you know how much profit you will have after the closing. You need to consider the costs of the sale before the sale and calculate the profit so that you are aware of the cost of your tax liability.
Expenses such as Realtor® fees, repairs, and closing costs will be taken from your proceeds and lower you capital gains tax liability. Having your attorney and accountant on board with you for a financial move of this size is a also a good idea. Any cost to you for their services may save you thousands of dollars for their insight into your financial dealings.
