DIRECT:    
 Welcome to the HillhouseRealty.com Blog

2017-02-16 07:52:12
How to Get the Primary Residence Capital Gains Tax

In order to  understand capital gain, we first need to understand tax basis. Your taX basis is the cost of buying, building or improving a property. Assume you pay $200,000 for a property. You incur $5,000 in closing costs. Then you spend $45,000 in home improvements. In that case, your tax basis would be $250,000. That's what it cost you to buy and improve the property.

Assume you later sell the property for $500,000. You incur $50,000 in sales commissions, transfer taxes and other sales expenses. You then subtract your $250,000 basis. Your capital gain would be $200,000.

Once you figure out your cpaital gain on a property, the next step is to calculate your taxes. In our exmaple, if you earn a $200,000 profit, you would likely owe $30,000 in capital gains taxes because the capital gains tax rate is currently 15% for most taxpayers.

In 2013, there was an additional 3.8% net investment income tax that was added by the federal government to help pay for changes to Medicare. This new tax applies to single taxpayers who earn more than $200,000 or married taxpayers who earn more than $250,000. You may need to pay an additional $7600 investment income tax in this scenario.

The Primary Residence Exclusion

If the property is your primary residence, you have what's called a principal residence exclusion. This means that a certain portion of the capital gain is excluded from tax. Married couples can exclude $500,000 of capital gain from tax. Individual or married couples filing a separate tax return can exclude $250,000 of gains from tax. In the example above, the entire $200,000 would be excluded from tax if this was your primary home. This means that you'd save at least $30,000 by using this exclusion (no capital gains tax and no 3.8% investment income tax). 

You Must Live in the Home for 2 Out of the Last 5 Years

In order to qualify for this exclusion, you must live in the home as your primary residence for two out of the last five years.

You Don't Have to Use the Procceeds to Buy Another Home

Back in the 1980s and 1990s, you were required to use the sales proceeds to purchase another home. That changed in 1997. Now you can do anything you want with your sales proceeds.

You Can Use the Exclusion Once Every Two Years

If you have a large capital gain on your property, why don't you consider selling it now and pocketing the proceeds tax free? Then you can purchase another home and do it all over again because there's no limit on how many times you can get this exclusion. You just have to wait 2 years in between each sale and make sure that you live in the property as your primary residence. 

The Exclusion Only Applies to Primary Homes

This exclusion doesn't apply to vacation homes or investment properties. It only works if you live in a property for two full years out of the last five full years. Also, there are some limitations on the exclusion if you turn a rental property into a primary home. 

 

PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATION PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 523. 

 
Blog Archive
2017-07-24 07:55:09
What Does an Agent Do All Day Anyway?

2017-04-20 07:39:18
Don't Be Fooled by These Three Selling Myths

2017-03-21 08:01:53
Plumb Crazy - Plumbing and Foundations

2017-03-09 15:27:31
Agent VS FSBO (For Sale By Owner)

2017-02-22 07:28:01
How Does a Home Warranty Work?

2017-02-22 07:24:15
Little things make a big impression on buyers

2017-02-16 07:52:12
How to Get the Primary Residence Capital Gains Tax

2017-02-09 05:09:37
U.S. News list ranks Austin best place to live in

2016-10-19 10:11:31
Austin Ranked High by Tourists

2016-08-17 07:01:20
What's That Gonna Cost?

2016-07-05 05:52:01
SELLERS: How to Get Ready for Your Home Inspection

2016-06-26 07:57:51
10 Reasons You Need an Agent

2016-04-02 09:15:16
Fastest Gowing Cities in America

2016-02-23 08:23:17
Housing Seasonality-How Does It Affect Buyers/Sell

2016-02-08 09:31:02
3 Things to Ignore When Pricing Your Home

2016-01-25 10:22:50
Texas Luxury Home Sales Report

2016-01-12 07:52:12
Wonder What Your Realtor Does Behind Your Back?

2016-01-01 13:23:44
6 Reasons to Contact a REALTOR in 2016

2015-12-02 07:06:12
SELL IT, SANTA! Debunking 3 Myths on Holiday Home

2015-11-16 08:33:32
Does a Home Warranty Cover Known Conditions?

2015-10-31 07:55:31
7 Dirty Little Staging Secrets No One Tells You

2015-10-29 06:48:36
BUYING A HOME: A BEGINNER'S SURVIVAL GUIDE

2015-09-26 07:58:48
7 Reasons to Use a REALTOR When Selling Your Home

2015-08-14 10:19:19
What Is The Biggest Reason For Mortgage Delay

2015-08-11 07:18:30
Home Prices Up Again in Austin Area

Click here to see ALL articles.


Comment on this Article

Your Name:
Your Email:
Comments:
Verify:  Please enter the numbers shown to help eliminate spam.