Selling Your Home? You May Not Know About This Tax Break
NEW YORK, Jan. 21, 2013 /PRNewswire-iReach/ -- According to economic indicators, home prices are beginning to rise ever so slightly. Specifically, in 84 of 100 of the top markets, prices have increased at an annualized rate of 3.3%. It's not much, but it's definitely a welcome relief for the housing market!
So, what does this mean for you?
Can you hope to regain some of the home value that has been lost in recent years? And even if you can see even a slight gain, what tax repercussions will you face?
The news is both good and bad. As to value, clearly the real estate market is nowhere near where it was prior to 2007. But on the positive side, certainly even modest gains are better news than the sharp drop in values that have plagued home owners since the housing market collapse.
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Better news is found in the tax arena. According to current tax laws, when you sell your primary residence for a profit, there's a likely chance that you can avoid paying taxes on that profit altogether.
Better yet, the rules are fairly simple -- at least as compared to most every other tax rule!
Before 1997, sellers were fully taxed on capital gains realized from the sale of their primary home. The only potential relief was to purchase another higher-priced home within two years of the sale of the first one. (The only exception was for those 55 years or older who could claim a once-in-a-lifetime tax exemption of up to $125,000 in profits.)
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But enter capital gains relief!
The Taxpayer Relief Act of 1997 delivered huge tax benefits to virtually all residential taxpayers. Eliminated were the rollover requirements and the once-in-a-lifetime exemptions. Instead, taxpayers were rewarded with per-sale exclusion amounts.
In simple terms, what this meant was that taxpayers who sold their primary residence could realize $250,000 in profit ($500,000 for a married couple filing jointly) without paying a single cent of capital gains taxes.
Could it really be this easy? Just about, although there is some fine print. Let's take a closer look:
There is no limit to the number of times you can enjoy this capital gains tax break. Bearing this in mind, there are some requirements attached to this.
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First, the residence must be your primary residence -- meaning you must actually have resided in the home for at least two of the five years before you sell it. Effectively, this means you could sell your home at a profit every two years without realizing a tax liability. Note, however, that investment homes or second homes are not exempt from capital gains taxes.
For married couples, either spouse can meet the ownership test. Simply put, if you resided in the house for at least two years prior to the sale -- yet you were married for a period of less than those two years -- as joint filers, you have met the ownership requirements even though your new spouse was not an owner for the full period. The catch is in the shared use requirements. Whether filing jointly or not, unless both parties actually reside in the house for the full two year period prior to the sale, they are not eligible for $500,000 joint filing benefits. If you suspect you are subject to these restrictions, it's probably a good idea to consult with a tax expert.
What if you cannot meet the full two out of five year residency requirements? Are there exceptions?
The short answer is yes. There are three basic exceptions:
1. A change in work location
If you have resided in your home for less than two years and you have changed jobs (or your employer has transferred you to a new location), you can exclude a portion of your profits. Talk to a tax professional to find out exactly how to do it.
2. Health issues
Should these issues warrant a premature sale of your home, be prepared to show documentation to the IRS.
3. Unforeseen circumstances
However, it's up to the IRS to determine if your specific circumstances actually count.
Media Contact: James Paffrath RealtyPin.com, 1-(866) 960-8649, firstname.lastname@example.org
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