It being May, I know taxes are the last thing on everyone's mind - but it's always important to make yourself aware of all of the different tax exemptions out there. Spring fever in the real estate market is here, and many people wait until May to put their homes on the market because of the buying frenzy that typically ensues. If you are considering selling your home, you will want to make sure you can take advantage of this deduction.
You may have heard about the notorious 1031 Exchange, especially if you have friends with investment or business properties. While this loop hole exists for the investment side of real estate, the home sale tax exclusion (also sometimes called the Primary Residence Exclusion) exists for owner occupied property. So exactly how do you keep the government from taking a piece of your home sale gains? Here are the basics:
- When you sell a home that has increased in value from when you bought it, you will pay capital gains tax on your profits.
- This exemption allows for you to exclude up to 250k for a single person (500k for a married couple) of your net gains from the sale.
- To qualify, you must have lived in your home for 2 consecutive years of the last 5 years. This means you can rent your home for 3 years and still qualify.
- Made improvements on your house? Great - you can get an adjustment on your basis that will increase the value on it, and subsequently lower the gain realized to help you stay close to 250k/500k.
- You can use this every 2 years as many times as you can over the course of your lifetime - as long as you follow the rules!
Taxes might be boring table convo - but one thing for certain is that it is very valuable knowledge to have!