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What To Know About Capital Gains Tax When Selling A Home

capital gains and selling a home

What To Know About Capital Gains Tax When Selling A Home

Capital gains tax is a tax homeowners and real estate investors will pay to the government after selling their home or investment property and they have made a profit.  Depending on the level of profit and whether the homeowners are married or not the tax can be zero or some other amount more than zero.  Real estate investors have different rules to work under and that will have an impact on what taxes they pay.  This article looks at the capital gains tax at the federal level and what homeowners and investors need to know about it.

Note on Tax Advice

The numbers in this blog article are general and with the tax laws being complicated, this article is intended to help homeowners and real estate investors better understand the capital gains tax process when it comes to selling a home or investment real estate.  As with anything tax related things could be different based on individual circumstances and both homeowners and real estate investors are advised to consult with a Certified Public Accountant (CPA) or a Tax Attorney for advice related to their particular situation.  By utilizing a tax expert money can be saved in the form of avoiding penalties for getting things wrong or by learning about other tax breaks that may be available based on an individual’s personal situation.

Home selling expert Bill Gassett of Maximum Real Estate Exposure provided sage advice on real estate taxes.

Paul, I have owned and sold several homes and have been a Realtor for three decades. So, of course, I have a significant amount of knowledge regarding capital gains taxes. That being said, I would always fall back on the expertise of a professional when it comes to such a vital topic like this. There are nuances to everyone's taxes. It makes sense to have a pro who can confirm your beliefs.

I encourage anyone to have a trusted expert in their corner. Relying on something you read online can bite you when the information isn't from someone with expertise on a given topic. 

Homeowner Capital Gains Tax

For homeowners if they have lived in the home for two out of the last five years prior to selling the home they may be able to exclude up to $250,000 in gains from being taxed or even a higher amount of $500,000 in gains if the homeowners are married.  What that means is if a homeowner bought a home seven years ago for $200,000 and sold that home today formoney $300,000 they would have a gain of $100,000 and that would not be taxed on that $100,000 for their federal taxes.  Now on the other hand, if the homeowner (unmarried) sold that same house for $500,000 today they would have $300,000 in gain with up to $50,000 of that gain being taxable.

Now if the same homeowner from above were married then even when selling a home at $500,000 after buying seven years ago at $200,000 their gain of $300,000 would not be taxed under the capital gains tax exemption available to a married couple who sell their home.  There unfortunately is no benefit for a homeowner who sells their home at a loss.  For example, the same homeowner who bought their home for $200,000 is now forced to sell for $150,000 due to the home being in poor condition, they could not use that $50,000 loss to deduct against other gains like a real estate investor could.

The amount of money put into a house to make the home better and thereby increase the value is not considered for homes occupied by the owner.  The only thing the capital gains tax law looks at is the original price paid for the home, how much the home is sold for and how long have the homeowners lived in the home.  A homeowner who did not live in their home the entire time but did live in it at least two out of the last five years may have some different options to consider with regards to money spent to improve the home.  Going back to the above advice, the homeowner should be consulting with a tax professional to make sure they get the best tax treatment possible.

Real Estate Investor Capital Gains

Capital gains for real estate investors become more complicated because real estate investors can depreciate the cost of their real estate purchase over a set amount of years.  What that means is that the real estate investor is able to use the reduction in value of the property to write off against income that property might take in, for example income in the form of rents.  Using similar numbers from the above example a real estate investor purchases a property for $200,000 they can use that $200,000 value to write off income over a 27.5 year period (this is the typical depreciation period).  What that means is for each year from one through twenty-seven point five the investor can use 3.636% of the purchase value to offset income from the property.

As noted above real estate investors can also write off money they spend to maintain/improve their investment property in addition to the depreciation already mentioned.  Real estate investors have no capital gains exemptions like a homeowner selling an owner-occupied home would have.  Real estate investors can use the 1031 tax exchange to defer payment of taxes when selling the property if the follow the rules for the exchange.  Real estate investors should be consulting with tax professionals to make sure they get full advantage of any tax breaks they may be eligible for.

We talked to Alex Capozzolo of SD House Guys, a real estate investor in California, who mentioned, "It's great that home values in most major markets have gone up over the past decade. Not complaining about that. Sadly, that also means bigger capital gains hits for us.

My partner and I have been able to offset some gains over the years through projects that have gone south. On average, we'll usually do one flip per year that we lose money on. That helps soften the capital gains blow from our other deals.

Overall, it's important to track everything each month or at least each quarter. You don't want to get whacked with a huge capital gains tax bill come tax season that you weren't prepared for. If you hone in on your gains versus losses for the year, it'll help you make better business decisions toward the end of the calendar year when preparing for the next tax season as a real estate investor.

Final Thoughts

Homeowners have a great tax benefit when it comes to selling their personal home in that some, if not all, of the gains can be had tax free.  Real estate investors have an entirely different set of rules for writing off real estate depreciation, money spent to improve real estate and more.  Everyone should be consulting with a tax professional in order to make sure they get the best possible tax outcome.

Addtional Resources

Capital Gains Tax When Selling a Home - Helpful FAQ on capital gains tax when selling a home.

About the author: The above article “What To Know About Capital Gains Tax When Selling Real Estate” was provided by Paul Sian. Paul can be reached at paul@CinciNKYRealEstate.com or by phone at 513-560-8002. If you’re thinking of selling or buying your investment or commercial business property I would love to share my marketing knowledge and expertise to help you.  Contact me today!

I service the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde ParkIndian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.

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