Expert: liznarr - 4/28/2010

Question
I need to sell my big home and 20 acres all paid for.If I sell for more than the next home I buy will i lose alot to taxes. I need the extra money to live on.

Answer
Hi Marie,

Sorry for the delay in responding.  This has been an extremely busy real estate weekend, and I am just now catching up on my email responses since Friday.

Many of my real estate clients are also asking this same question that you did about capital gains taxes.

Depending on a number of factors …

… The amount you paid for your home, plus any capital improvements you made during your ownership, and

… The amount you sell your home for,

… Your capital gains exclusion amount (single versus married category),

… You will “not necessarily” lose a lot of money to taxes if … you sell your current home for more than the next home you buy.  

I am giving you some examples below, and you can read more on this subject in IRS Publication 523, Selling Your Home.  If you click on this link
http://www.irs.gov/app/picklist/list/publicationsNoticesPdf.html
and then scroll down to Publication 523 (on page two of the list of pages),
you can save this publication to your computer and either read it there or print it out.

I am not an accountant and am not qualified to give accounting or tax advice, so you should verify this information with your CPA and/or tax preparer.

An INDIVIDUAL selling his/her personal residence can exclude up to $250,000 of GAIN on the sale of a personal residence.  A MARRIED COUPLE can exclude up to $500,000 of GAIN on the sale of their personal residence.

Many people sometimes confuse the definitions used for computing capital gains tax due:

BASIS is the amount you PAID for your property,

REVISED BASIS is the amount you paid for your property, PLUS any CAPITAL IMPROVEMENTS you made to the property during your ownership such as new roof, room additions, new HVAC system, etc.  Since you own acreage on which your principal residence is located, you might want to check with your accountant/tax preparer and ask if you had expenses for land clearing, fencing, cross-fencing, etc., if those amounts could also be added to your BASIS.

SALES PRICE is the amount your principal residence sells for.

GAIN, for purposes of computing capital gains taxes, is the difference in your SALES PRICE less (1) your REVISED BASIS, and (2) your capital gains excludable amount.

An over-simplified example is given below, assuming you are filing as SINGLE status, with an excludable gain amount of $250,000.  If you are married, the excludable gain amount is generally $500,000:  

If you paid $100,000 for your personal residence (this is your beginning “basis”), and you then sold it for $350,000 or less (SALES PRICE), you would NOT owe any capital gains tax because your GAIN was not over $250,000.  In other words, $100,000 + $250,000 (excludable gain) = $350,000; and no taxes would be due on a sales price amount of $350,000 or less, because … your GAIN did not exceed $250,000.

Let’s say you sold your personal residence for $400,000 and your revised basis was $100,000 + $25,000, or $125,000.  (We are assuming here that $25,000 worth of CAPITAL IMPROVEMENTS were made to the principal residence.)

You would then add $125,000 and $250,000 (excludable gain), which equals $375,000.  Therefore, on a sales price of $400,000, you would owe capital gains tax only on the $25,000 difference.  ($100,000 + $25,000 + $250,000) = $375,000), subtracted from $400,000 = $25,000

There are rules which apply to the $250,000 or $500,000 capital gains exclusion:

You must have owned the home for at least 2 years; and you must have lived in the home as your main home for at least two years.

If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases.  However, the maximum amount you may be able to exclude will be reduced.

I hope I have explained this in a way that you will be able to understand.

Keep in mind that the above examples are for the current capital gains law and that other rules could also apply, depending on your circumstance.  Many people have concerns that the Obama administration will change the capital gains laws to increase the government’s tax base.  Should that happen, the above information would be outdated.

Good luck to you, and feel free to write again if you have additional questions.

Regards,
Elizabeth