#QuickTipTuesday – Capital Gains Taxes and Home Owner Exemptions

If you sell your home in today’s market, it is likely you will be making a sweet profit!

If you have owned your house, condo or townhouse in Seattle for more than 2 years, odds are good that it is worth at least 15% more than you paid for it.  Some of you may be thinking it is time to sell that home and move into a different/better/larger/smaller place to call home.  

Watch the video here.

Capital Gains Tax = When you sell an asset (such as a home), for a profit, the IRS taxes that profit.  The tax rates for capital gains are lower than our standard income taxes, but they can still cut into your bottom line.

The Good News:

 The good news is that the IRS allows you to make up to $250,000 profit (for an individual, up to $500,000 for a married couple) on the sale of your primary residence and that amount is exempt from any capital gains taxes.

An example:

 Let’s say that Bob bought a townhouse in 2012 for $350,000.   He has decided to sell it and move to a condo downtown.   His townhouse is now worth $525,000.  That leaves Bob with a $175,000 profit!  According to the IRS rules, he will not have to pay a penny of capital gains tax on that $175,000 profit.

  Let’s say that Bob bought his townhouse in 2001 for $200,000.  If he sold it today for $525,000 he would have a $325,000 profit.  In this scenario, Bob would only have to pay capital gains tax on $75,000 of that profit.

The Nitty-Gritty:

As with most tax breaks, this one has some rules.  In order to take advantage of the Capital Gains Tax Exemption, you need to have had the home you are selling be your primary residence for 2 of the last five years.   Let’s go back to Bob’s townhouse:

Let’s say Bob bought in 2012 and lived in the townhouse until 2015.  In 2015 he moved in with his girlfriend and starting renting out his townhouse.  As long as Bob sells the townhouse and it was his primary residence for at least two of the last five years, he can still take advantage of the Capital Gains Tax Exemption.   If Bob rented the house for four straight years, he would no longer be able to take advantage of the Capital Gains exemption since it was not his primary residence for two out of the past five years.

How This Impacts You:

 We all know that now is an AMAZING time to sell a home.  If you have been considering selling, not only is this a great time to be a seller, but you can take advantage of this great tax savings to have even more available funds to get into your next house.

 If you have been renting out your property but feel like you might want to sell, keep in mind the above timeline.  If you can sell while you are still able to prove that the home was your primary residence for at least two out of the last five years, you can take advantage of the tax savings. 

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