I?m contemplating selling my house and choosing to rent for a while. Does this mean I?m going to pay higher capital gains taxes on the sale of my home because I decided not to put the money towards another house?
You?ll be glad to know that the answer is no. The old law allows sellers to avoid paying taxes on profits from selling their home as long as they put the gains into purchasing a new house. In 1997, the rule was modified, and now people can choose to exclude a large part of their profits from taxes, even if they decide not to buy another house after the sale.
Your tax-filing status and how long you owned the house impacts your circumstances. Current laws allow you to exclude $250,000 in gains on your home?s sale if you file a single tax return, while the limit is $500,000 if you?re married and file a joint tax return with your spouse. You must have lived in the home as your primary residence for at least two of the last five years to qualify. As an example, if you?re married and bought a house for $250,000 and sold it later on for $500,000, you won?t be taxed on the $250,000 profit you made from the sale of your home because the gains are less than the exemption amount established by the IRS.
You can still minimize how much you pay in taxes if you exceed the base threshold. Take the price you sold your house for, minus expenses such as the commission to the agent, and take away the amount you paid for the home plus closing costs to calculate the adjusted tax basis. You?re also able to include other costs such as major home renovations. Necessary home maintenance costs aren?t covered under the rule, but things such as a new roof, kitchen renovation, adding a deck, or replacing the heating and air conditioning system. Keep an accurate record of the costs you incur while completing the projects for at least three years after you sell the home.
Even if you haven?t resided in the home for two of the last five years, you can still exclude some of the gains if you moved due to changes regarding your health, family, or work situation. Some circumstances that qualify include the death of a spouse, divorce, a new job more than 50 miles from your property, or giving birth to twins, triplets, or more babies at one time.
Taxes are a complicated and complex issue that make it difficult to manage your finances if you?re not aware of the potential benefits or consequences that you face.
Refer to IRS Publication 523, Selling your Home, to get a more in-depth look at the requirements and see how you can maximize your tax savings.