Real Estate & Taxes:

Selling Your Home

On almost every home sale, the seller no longer has to pay taxes on his gains. The capital gains tax is a thing of the past thanks to the Taxpayer Relief Act of 1997. Gains of up to $500,000 for married couples and $250,000 for single men and women are exempt from taxes. This means they pocket all of the profit they make off the home sale.

However there are a few exceptions:

• For people who live in large mansions and the appreciation of their home exceeds the exemption of $500,000 and $250,000 for gains.
• If you used the home for less than two years of the five years prior to sale of the home.
• There are no tax breaks for people who sell their home at a loss. The losses are not tax deductible. What they can do to stop the house from further depreciation in value is turn it into a rental property. Now whatever depreciation occurs on the rental property, it can be deductible. So it would be a good idea on a home that is losing its value quickly to turn it into a rental property prior to its sale.
• The exemption on capital gains tax doesn't apply to people who claim rental deductions or home office deductions. For the exemption to work you have to use 100% of your home as your principle residence for at least two years. It's always a good idea to stop claiming home office deductions two years prior to the sale of the house. This way you can take advantage of the exemption. You do get partial exemption for the parts of your home that you used as primary residence for the last two years. For example, a married couple sells their home and makes $300,000 in gains from the sale. But over the years, they had taken $25,000 in deductions for their home office. They pocket $275,000 without paying tax on it. They pay 25% capital gains tax on the leftover $25,000.
  

The best thing to do is keep your home in good quality and let the value of the home appreciate over time. And if you rent out your home, start using it as your principal residence two years prior to its sale. This way, come sale time, all the profit you make off the sale up to $500,000 could end up with you tax free. Or as long as you lived in that house for a two-year period in the last five years prior to sale, you can still pocket the gains. For example, Joe lived in his house for two years and then moved to another city renting out his home. He returns two years later and sells his home. He still qualifies for the tax exemption.