Do you qualify for capital gains tax exemptions?
Capital gains tax applies when you sell something for a profit. That means if you’re selling your home for more than you paid for it, you need to report that gain to the Internal Revenue Service. That’s when the IRS taxes those gains, and the amount could be hefty depending on how much profit you make. That is unless you meet these three conditions that exclude some or all of the capital gains taxes:
- You’ve been the homeowner for at least two years.
- You’ve lived in the home for the last two years.
- You haven’t excluded the gain from another home sale for at least two years.
Single homeowners who meet these conditions can exclude up to $250,000 of their gain, while those who are married and file jointly can exclude up to $500,000, as long as your partner lived in the home for at least two years. You just have to be cohabitating, not married, unless you or your partner sold a home and used the capital gains tax exemption within the last two years.
There’s been a recent change to the rule that also allows exemptions for special circumstances. What is considered a special circumstance? Here’s an example: Perhaps your spouse recently passed away. In that case, the IRS allows you to qualify for the $500,000 tax exemption as long as you sell your home within a two year period. The rule used to say widows or widowers had to sell within the same year their spouse passed away in order to qualify for the full exemption.
How are capital gains calculated?
- Besides real estate, capital gains taxes can apply to any investment, such as stocks or bonds, cars, boats, and other tangible items.
- Any profit you make on the sale of these items is your capital gain. Money lost is considered a capital loss.
- Capital losses can be used to offset gains.
- Your net capital is the difference between your capital gains and your capital losses. For those whose losses exceed their gains, the difference can be deducted on your tax return.
- To determine what tax rate applies to your capital gain, just include the amount to your income tax. Use this Capital Gains Calculator from the IRS.
- Please consult your tax advisor to find out how much you can save.
There’s a difference between short- and long-term capital gains
When it comes to being taxed, the length of time you’ve owned a home comes into consideration. This could mean losing or keeping thousands of dollars, depending on your tax bracket and the value of your home.
- Short-term Capital Gains: Applies to assets you’ve owned fewer than twelve months. In that case, the rate will be equal to your current tax bracket.
- Long-term Capital Gains: Applies to assets owned for twelve months or more. In this case, you could end up paying nothing, not a dime, depending on your tax bracket. Those with a higher income could have to pay, but only 15 or 20 percent.
“Long-term gains are always taxed at lower rates than short-term gains, so holding the assets for more than a year will always be the most advantageous tax maneuver,” explains Steven Wolpow, managing partner of Nussbaum Yates Berg Klein & Wolpow, a leading CPA Firm in New York. “There are other financial and investing strategies to consider, so in some instances it still may make sense to sell the assets sooner and take the tax hit. But with all other things being equal, holding the assets more than a year reduces your tax burden significantly.”
Experts recommend homeowners keep concrete records of any updates, too. Remodeling, adding newer appliances, updating floors and windows and other remodeling projects only improve your home’s value.
As you can see, you don’t need to use capital gains tax as an excuse not to move. Instead, make sure you qualify for the capital gains tax breaks listed above. They’re designed to help homeowners like you when it comes time to move.
If you’re considering moving, that probably means selling your home. If your home or home away from home is in Montecito, Hope Ranch or any of the Santa Barbara area’s upscale neighborhoods or communities, call me at +1-805-886-9378 or email me at Cristal@montecito-estate.com. I’ll happily add your listing to my portfolio of fine homes and find your new dream home simultaneously.