Selling a property - whether it be your primary residence or a vacation home – can be an exciting, yet overwhelming process. From marketing the property, to signing all the paperwork, you are likely going to be accompanied by a headache or two during the process. However, fear not, because we at Sturgill & Associates are going to act as a dose of aspirin, and take care of at least one of those headaches!
Is the profit from the sale of my proprety taxable?!
Good question! And the answer is, it depends!
You are selling your Primary Residence:
The sale of your home in which you occupy as your primary living space has a “Capital Gains Exclusion” up to $250,000 for single individuals, and $500,000 for those Married Filing Joint.
For example, if you purchased your home in 2010 for $200,000 and sold it today for $400,000, the profit from that sale would be completely tax-free. Note that if you were married filing jointly, you could have sold that same property for $700,000, and had $500,000 of tax-free profit.
However, to qualify for this tax break, there are three tests you must meet:
- Ownership: The property must have been owned for at least two
years during the five years prior to the date of sale - continuity does
not matter. For example, using the same scenario as above - if you
lived in that $200,000 home for 12 months in 2010, lived somewhere
else from 2011 to 2013, and returned in 2014 - the 2 out of 5 year test
would still be met.
- Use: The home must be used as your principal residence for at least
two (2) of the five (5) years prior to the date of sale.
- Timing: You have not excluded the gain on the sale of another home
within two (2) years prior to this sale.
You are selling your second (or vacation) home:
The sale of a second home will result in capital gains taxes on the net proceeds from the sale - net proceeds is defined as the sales price minus closing costs and what you paid for it (basis). The term basis is usually referencing the property’s original cost, however it is important to keep track of what you spent on improvements (i.e. kitchen remodel, new central AC unit, etc.) because those items add to your basis.
For example, you bought a vacation home for $200,000 and remodeled the kitchen for $20,000 - if that was the only improvement you made to the property, your basis would then be $220,000. Now you go to sell that property for $300,000, with closing costs of $15,000 and a basis of $220,000, your profit subject to capital gains tax would be $65,000. If the property was sold for less than it’s basis resulting in a loss, the loss is NOT deductible.
It is important to note that the above mentioned “improvements” to a property are also applicable to a primary residence. Large equipment replacements and/or renovations to your home also increase the basis you have in your principal residence.
As always, situations arise that are more complex than the examples above. We are here to help! Reach out to us and we will be more than happy to assist you in the process. Remember to leave us a comment or Direct Message on Facebook telling us what topic you want to read about next week!