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Please remember this information is time sensitive, this is opinion only and you should always get professional help, ie. A Tax Specialist.
Selling a home is a less taxing prospect since the 1997 tax law changes ? literally. If youre married, you can exclude up to $500,000 of the profit from the sale. If youre single, you can exclude up to $250,000 (of course, if the house sold for $200,000, you can only exclude up to $200,000).
Qualifying is simple: besides selling your house for a lot of money (we know this isn?t hard in Silicon Valley), you must have owned and lived in the house for two out of five years before the sale. And this is not a one-time exclusion: you can use this exclusion every time you sell a house, as long as you havent sold another house in the last two years. If youre married, you have to meet additional requirements to take the $500,000 exclusion:
- You must file a joint return
- You or your spouse, or both of you must own the house
- You and your spouse must have lived in the house
There are also exceptions where you may be able to take the exclusion even if you don?t meet the ownership and use tests, and you may be able to take a partial exclusion even if you can?t take the whole exclusion.
The IRS is well aware that married couples can face some complicated situations when selling a home these days. Here?s how to deal with them:
- If you are filing a joint return, but were not sharing the residence you sold with your spouse, you can claim an exclusion of up to $250,000. Your spouse can also claim a $250,000 exclusion on the sale of the other home that served as his or her residence.
- If only one spouse meets the requirements for ownership and use, you and your spouse can take separate $250,000 exclusions. Example: One spouse moves to take a job in another state, making the couple ineligible to claim the full $500,000 exclusion. In this case, the spouse who remains in the home can exclude up to $250,000 when the house is sold, while the out-of-state spouse can take a partial exclusion, based on the length of time they lived in the house.
- If you marry someone who has used the exclusion within the last two years, you are limited to a maximum exclusion of $250,000. After two years have passed since either of you claimed the exclusion, you can exclude $500,000 of gain on your joint return the next time you sell a house if both of you meet the ownership and use requirements.
Remember: the exclusion applies only to your principal residence, which is the dwelling where you spend most of your time. A vacation home used only seasonally does not qualify. And while the residence can be a variety of types ? mobile home, trailer, houseboat, condominium, or stock you hold in a cooperative apartment ? an investment in a retirement home does not qualify if you do not receive a legal interest in the property.
Understanding Capital Gains in Real Estate
When you sell a stock, you owe taxes on your gainthe difference between what you paid for the stock and what you sold it for. The same is true with selling a home (or a second home), but there are some special considerations.
How to Calculate Gain
In real estate, capital gains are based not on what you paid for the home, but on its adjusted cost basis. To calculate this:
1. Take the purchase price of the home: This is the sale price, not the amount of money you actually contributed at closing.
2. Add Adjustments:
- Cost of the purchaseincluding transfer fees, attorney fees, inspections, but not points you paid on your mortgage.
- Cost of saleincluding inspections, attorney's fee, real estate commission, and money you spent to fix up your home just prior to sale.
- Cost of improvementsincluding room additions, deck, etc. Note here that improvements do not include repairing or replacing something already there, such as putting on a new roof or buying a new furnace.
3. The total of this is the adjusted cost basis of your home.
4. Subtract this adjusted cost basis from the amount you sell your home for. This is your capital gain.
Here is a great CALCULATOR to figure if and how much your capital Gain may be, as an investment or your personal home.
Making Home Sale Capital Gains Disappear - Excellent Link-be sure to follow the other links at the page.
http://www.fool.com/taxes/2000/taxes000428.htm
Home Sale Exclusions Expanded Part 1
http://www.fool.com/school/taxes/1998/taxes980212.htm
Home Sale Exclusions Expanded Part 2
http://www.fool.com/school/taxes/1998/taxes980219.htm
More General Info
http://www.homegain.com/tools/CapitalGains
More General info:
http://homebuying.about.com/od/capitalgains/
Example: 2003 - Form 1040 Schedule D
http://www.irs.gov/pub/irs-pdf/f1040sd.pdf
Investment property Capital Gain Information
If you do not exchange into another real estate Investment (1031) and want to cash out?...the above links will help you.
More about Investment - Capital Gains
An increase in the value of a capital asset (investment or real estate) that gives it a higher worth than the purchase price. The gain is not realized until the asset is sold. A capital gain may be short-term (one year or less) or long-term (more than one year), and must be claimed on income taxes.
Long-term capital gains are usually taxed at a much lower rate than regular income. This is done to encourage entrepreneurship and investment in the economy. Many times only 15%.
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