Making the leap from renter to homeowner is often an important milestone for many people, giving them a sense of “grown-up” satisfaction, or maybe signifying that they have finally staked out their piece of the American Dream. But how do you avoid unnecessary taxation when you are ready to sell your first home?
Many people focus on achieving that first monumental step, so much so that they have no idea how to proceed wisely when it comes time to sell that first piece of the American pie.
What are capital gains taxes?
Capital gains taxes are a form of tax that is owed when you decide to sell a piece of property or other asset you own that increases in value over time. Different kinds of assets, like real estate or stocks and bonds, are governed by different laws that determine how they are taxed.
Do I always have to pay capital gains tax when I sell my home?
When you sell your home, it is possible to be exempt from capital gains tax, as long as you meet certain requirements:
- You must have been the owner of the home for at least two full years.
- You must have lived in that same home for at least two of the last five years.
- You must have used that home as you primary residence.
If you meet all of these requirements, it is possible that you may be able to avoid capital gains tax on the profit when you sell the home. If you are single when you sell the home, you may not be liable for capital gains for the first $250,000 of profit from the sale. If you are married and filing jointly, you may not be liable for up to $500,000 of profit from the sale.
Are there any other ways to reduce my tax obligation from selling the house?
Yes, it is possible to reduce your tax obligation further if you make more profit from the sale of the home than you can exclude with the previously mentioned exemptions. Any money that you spent on home improvements while you owned the property may be deductible, also. If, for instance, you spent $50,000 dollars on replacing the roof and the water heater and finishing out the attic, that money can be subtracted from the sale price of the home when you sell it.
It may seem too good to be true that some simple planning and research can save you thousands of dollars in taxes when selling your home, but that’s the good news – it’s true!
Taxes, however, are not a matter to be taken lightly. If you have any questions about tax preparation or other tax liability issues that may arise from buying or selling property or assets, don’t hesitate to contact a qualified attorney who can help ensure that you are in the clear with the IRS, and help you avoid tax problems before they even have time to occur.