It feels great to get a high price for the sale of your home, but watch out: The IRS may want a piece of the action. That’s because capital gains on real estate are taxable sometimes. What many people do not know is that a large portion of homeowners who sell their homes are able to do so without paying the IRS a penny.
There are some requirements that have to be met for you to live the good life after selling your home. The property has to be your principal residence (you live in it). If it is an investment property, you will have to follow the normal capital gains on home sale rules. Also, you have to live in the residence for two of five years before selling it. (This is also a sneaky way of saying you can only sell a home once every two years at the minimum). The good news is, if your gain does not exceed the limit, you don’t have to file anything with the IRS.
Once you decide you are eligible to sell and meet the capital gains exclusion rule, you have to do some math so you avoid pulling out your checkbook after you sell. First, keep in mind you have to think about more than the money that you received during the sale. It is important, but other numbers play a factor too. You have to consider your gain. It is what decides whether you will have a tax bill.
To get to your gain amount, establish your basis in the home. (Usually this is what you paid for the residence and the capital improvements that you made). Compare the basis amount to what you received from the sale (excluding commissions and other expenses). This number provides you with the capital gain on the sale. Usually, you will find that you got some profit, but it isn’t large enough for you to have to pay taxes on it.
It’s important to note that improvements increase your basis, so a smaller portion of the selling price is considered a gain. The American Relief Act is 20% for higher income taxpayers and 15% for many individuals and 0% for some sellers. Even if you are unable to meet all of the tests, it does not mean that you will not get any sort of tax break at all.
If you are selling your home because of special conditions, you are eligible for a prorated tax-free gain. In this case, you would calculate the fractional amount of time that the two-year use test was met. Learn more at Americantaxservice.org
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