Sale of Residence Exclusion

Let’s talk about the sale of residence exclusion. So you own your home and here you are excited, okay I’m ready to sell that home, but what are the potential capital gains and how would that work from a tax perspective? So if you’re a single tax payer you can exclude up to $250K of gains and if you’re married that equals $500K. So again this only applies to the gain on the sale of your property. So let’s say for example you had a home where you’re single and you’ve bought it and invested $250K. Then okay you could sell for say upward of $500K, realize this $250K of gains and that would be excluded. So you wouldn’t have any tax implications. The old rules you used to defer the gains as you buy and sell properties and then at age 55 there would be a one time exclusion. So all those old rules have gone by the wayside. Now when you sell your property, there’s a five year look back to determine if that’s been your principal residence for at least two of the past five years. So you have the ability to do this where you buy and sell properties every two years. But the question comes up sometimes what if we had a second home, maybe a vacation home that you’ve used. It’s a possibility where as long as it’s been your principal residence for at least two years of the past five years you’d be able to exclude it. However rental properties, a whole different ball game with that. If you’ve been depreciated that rental property and getting a tax deduction over the years for that, it’s not necessarily going to work. The IRS caught on to this and they’re going to be looking at essentially how much of the property you’ve depreciated and they want to know how many years you’ve been renting that property. So as an example let’s say you moved into that rental property and you’ve been in there two years of the 20 years that you’ve owned it and been renting it out, so essentially two of the 20 years that was the case so you’ll have a 10% exclusion. So again for a single tax payer, that’s $25K. For a married tax payer that’s $50K of taxable exclusion. Vacant land, if that’s a contiguous two year existing principal residence, then again you would be able to apply this. The equation for all of this is again going to be your sell price minus the purchase price, plus improvements and plus closing costs is going to get you to whatever that taxable gain and then you subtract that exclusion. Hope you found this helpful as hopefully you’re enjoying real estate and the joys of owning it.