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Capital Gains Taxes On Real Estate

CAPITAL GAINS 101

The IRS and many states collect capital gains taxes on the difference between what someone pays for an asset (their “basis”) vs what they sell it for.

This tax applies to most assets such as stocks, cars, boats and of course real estate.

EXCLUSION AMOUNTS

The IRS allows property-sellers to ignore capital gains for tax purposes for:

  • Up to $250,000 if a seller is single; and
  • Up to $500,000 if sellers are married.

Example: If a married couple buys a house for $400,000 and sells it five years later for $1 million, they will make $600,000. But, only $100,000 of that “capital gain” will be subject to tax.

QUALIFYING FOR CAPITAL GAINS

Two Year Rule: The home needs to have been a principal residence that was lived in for at least two of the previous five years. The two years need not have been consecutive.

Sellers are ineligible for the exclusion if they took advantage of the exclusion in the previous two years.

They are also ineligible if the property was purchased via a 1031 exchange.

Homeowners should also keep their receipts for ALL home improvements, as this will help them increase their “basis” (the cost of the home) and decrease their capital gains.

And finally – my above summary is somewhat oversimplified for brevity purposes and we are not qualified to give tax-advice. We therefore always recommend that all sellers consult with a CPA if they are trying to minimize their capital gains taxes.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646