Are you thinking of selling your primary residence? Before you take that leap, it’s essential to understand the ins and outs of potential capital gains tax to avoid any unwelcome surprises come tax season. Let’s delve into the basics and exceptions to ensure you’re well-informed about what’s ahead. You don’t want to incur a larger-than-necessary tax bill.
TAX BASICS
When it comes to gains on the sale of personal or investment property held for over a year, the IRS applies favorable capital gains rates of 0%, 15%, or 20%. People with higher incomes will receive an additional 3.8% investment tax. It’s important to note that gains on properties held for a year or less are subject to higher ordinary income rates. However, residential real estate enjoys certain exceptions.
TAX EXCEPTIONS FOR YOUR PRIMARY RESIDENCE
If you’ve owned and lived in your primary residence for at least two of the past five years, you will receive a tax-free exclusion of up to $250,000 ($500,000 for joint filers) of your gain. Any gain exceeding this exclusion is then taxed at capital gains rates. Unfortunately, losses from such sales are not deductible. In the event of a death, a spouse that sells the family home within two years after the other spouse’s passing can still get the total $500,000 exclusion, provided the two-out-of-five-year use and ownership test were met before death.
CONSIDERATIONS FOR EARLIER SALES
Life is unpredictable, and sometimes circumstances force an earlier home sale. In such cases, whether due to job changes, illness, or unforeseen events, you may still be eligible for part of the gain exclusion. The applicable exclusion percentage corresponds to the portion of the two years you used the home as a residence
NATURAL DISASTER DAMAGE
If your home was damaged or destroyed in a federally declared natural disaster, your capital gain amount equals any insurance proceeds you received that exceed your pre-disaster tax basis in the home. The gain exclusion is available for this gain amount.
Selling a home can be a complex and emotionally charged process. Before making any decisions, consult with real estate professionals and tax advisors like the Boris Benic and Associates team, who can guide you through the process. By doing so, you’ll not only navigate the intricacies of capital gains tax but also ensure you’re well-prepared for your next financial chapter, including budgeting for your new home.