Understanding Capital Gains on Your Primary Residence

Homeownership marks a major life milestone. Besides shelter, it’s an investment that can bring financial gains. Capital gains tax is crucial when selling a primary residence. Let’s discuss what it entails, its calculation before and after two years of ownership for singles and couples, and the need for advice from a CPA or accountant.

What are Capital Gains?

Capital gains are profits earned from the sale of an asset, such as real estate or stocks, exceeding the original purchase price. Specifically concerning a primary residence, the capital gain is the difference between the property’s sale price and its original purchase price. However, when it comes to selling your primary residence, the IRS offers certain exemptions to reduce or eliminate capital gains tax.

Capital Gains on a Primary Residence

For single homeowners or married couples filing jointly, the IRS allows an exclusion on the capital gains tax of UP TO $250,000 FOR INDIVIDUALS AND $500,000 FOR MARRIED COUPLES. To qualify for this exclusion, certain conditions must be met:

Ownership and Residence

• Ownership: The property must have been the primary residence for AT LEAST TWO OF THE LAST FIVE YEARS LEADING UP TO THE SALE.
• Residence: The homeowner(s) must have lived in the house for a minimum of two years during that five-year period.

Calculating Capital Gains

The calculation for capital gains on a primary residence involves subtracting the property’s adjusted basis from the sale price. The adjusted basis includes the purchase price, any qualified improvements or renovations, and certain closing costs.

Before Two Years of Ownership:

If the property is sold before completing two years of ownership, the homeowner(s) might not qualify for the full exclusion. In such cases, the capital gains will generally be taxed at the applicable capital gains rate.

After Two Years of Ownership:

If the property is sold after meeting the two-year ownership and residency requirements, the homeowner(s) can qualify for the exclusion. This means they may exclude up to $250,000 (individual) or $500,000 (married couple) of the capital gains from their taxable income.

Seeking Professional Advice

Navigating the complexities of capital gains tax on a primary residence can be challenging. While this overview provides valuable insights, it’s essential to consult with a certified public accountant (CPA) or tax professional. They can provide tailored advice based on your specific situation and ensure compliance with tax laws.

Professional accountants can assist in:

• Determining the adjusted basis of your property accurately.
• Assessing your eligibility for the capital gains exclusion.
• Advising on any additional requirements or exceptions that may apply to your case.
• Helping with tax planning strategies to minimize tax liabilities.

Conclusion

Understanding capital gains on your primary residence is crucial when planning to sell your home. The IRS provides exclusions that can significantly reduce or eliminate the capital gains tax, provided certain ownership and residency criteria are met. However, the rules surrounding capital gains tax can be intricate, and seeking guidance from a CPA or accountant is highly advisable to ensure compliance and optimize tax benefits.

Remember, while this article offers general information, specific circumstances may vary. Therefore, for personalized advice tailored to your situation, consulting a tax professional is the best course of action.

Always seek advice from a certified professional before making financial decisions or finalizing tax-related matters.

Rana Real Estate Group is your dedicated partner in navigating the world of real estate. Whether you’re looking to buy your dream home, sell a property for maximum value, or invest wisely in the market, our expert team is here to guide you every step of the way. With our comprehensive knowledge, personalized approach, and commitment to your goals, we ensure a seamless and successful experience in buying, selling, and investing in real estate. 

Rana Khanjani, MBA 

Specializing in Commercial, Residential & Land