Capital Gains Exemptions
Tax-free (sometimes) Investment? Really?
For the past several years, homeowners enjoyed the ability to make a profit of up to $500,000 (married) or $250,000 (single) on certain real estate investments and pay no (nada, zip, zilch, the big zero) capital gains taxes. This favorable provision in the tax code came within days of dying a painful death with the new tax programs initiated at the end of 2017 and taking effect in 2018. Fortunately, the provisions were maintained in a last-minute amendment to the proposed law.
To make it clear why this is so important, let’s look at a couple of scenarios, but please note that this blog is general information and not specific tax/legal advice. You should always consult a tax specialist when making financial decisions of this type.
You and your spouse file jointly
You have a combined income of between approximately $77K to $479K
You are about to sell your primary residence and your capital gains is $500K or more. This might be a common scenario for dual-income families in Los Angeles who have owned their properties for 20 years or more.
Based on the income, your long-term capital gains rate would be 15% of your gain.
In this scenario you could be exempt from nearly $60,000 in taxes (if you meet all of the qualifications for the exemption).
Any gain above the $500,000 exemption would still be taxed at the 15% rate, but you would still be putting an extra $60K in your pocket from the sale as a result of this exemption!
Many people will not have a gain of $500,000. But the exemption is still valuable.
Income levels are the same as above
Let’s say you bought a home for $400,000 and now, you sell it for $600,000.
After paying sales commissions and other deductible expenses, your gain might be $150,000 (depending on your cost basis, which may include factors other than just the purchase and sales costs) You still save 15% of $150,000 or $22,500
There are multiple rules for qualifying for these exemptions and some exceptions, but the basics are:
The property must have been your primary residence
You must have lived in the property for at least two of the past five years
You must not have claimed this exemption in the past two years
There may be other qualifying tests and exceptions to the rules above and the basics can be found in the IRS website. A brief overview of the requirements and links to related documents can be found at https://www.irs.gov/taxtopics/tc701
Please note that everybody’s scenario may be different, and the laws change periodically. As a result, you should always consult a tax specialist about your tax and investment options. This tax exemption came very close to disappearing with the tax law changes made at the end of 2017. The fact that this law survived may be a significant consideration for people interested in selling their homes this year. I hope you’ll visit my website, or contact me for a no-cost, no-obligation evaluation of your home’s value in today’s market; -- it may provide you with beneficial tax savings.
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