Real Estate and Capital Gains Tax: What You Need To Know

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I recently had a seller ask me if they’d have any capital gains tax implications due to quicker than anticipated move.  The seller is jetting for greener pastures, and while there’s some potential profit in the home sale, the prospect of handing a handful over to Uncle Sam is less than ideal.  What to do, what to do.

For the uninitiated, when you sell your home you are able to exclude up to $250,000 ($500,000 for couples) of your capital gain from taxes.  In order to take advantage of this, however, a seller needs to have occupied their home as their primary residence for two of the last five years.  In researching the matter for my client, I realized that the answer- for sellers who’ve occupied for less than two years- isn’t so cut and dried.  From an excellent article on Nolo.com:

Even if you haven’t lived in your home a total of two years out of the last five, you’re still eligible for a partial exclusion of capital gains if you sold because of a change in your employment, or because your doctor recommended the move for your health, of if you’re selling it during a divorce or due to other unforeseen circumstances such as a death in the family or multiple births. (“”I changed my mind about living here”” won’t cut it.) In such a case, you’d get a portion of the exclusion, based on the portion of the two-year period you lived there. To calculate it, take the number of months you lived there before the sale and divide it by 24.

In the case of this particular seller, this was a pretty relevant piece of information.  If you have any general question as to how your gain might be impacted by this tax, you should read the article in its entirety.  It’s really interesting, especially considering (and despite the fact) that it’s about taxes.

Image Credit: Copyright Chuck Holton Via Creative Commons License

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