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Capitial Gains Primary Residence exclusion
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HOW TO GET THE PRIMARY RESIDENCE CAPITAL GAINS TAX EXCLUSION • In order to understand capital gain, we first need to understand tax basis. Your tax basis is the cost of buying, building or improving the property. Assume you pay $200,000 for a property. You incur $5,000 in closing costs. Then you spend $45,000 on home improvements. In that case, your tax basis would be $250,000. That’s what it cost you to buy and improve the property. • Assume you later sell the property for $500,000. You incur $50,000 in sales commissions, transfer taxes, and other sales expenses. You then subtract your $250,000 basis. Your capital gain would be $200,000. • Once you figure out your capital gain on a property, the next step is to calculate your taxes. In our example, if you earn a $200,000 profit, you would likely owe $30,000 in capital gains taxes because the capital gains tax rate is currently 15% for most taxpayers. • In 2013, there was an additional 3.8% net investment income tax that was added by the federal government to help pay for changes to Medicare. This new tax applies to single taxpayers who earn more than $200,000, or married taxpayers who earn more than $250,000. You may need to pay an additional $7,600 investment income tax in this scenario. • • THE PRIMARY RESIDENCE EXCLUSION • If the property is your primary residence, you have what’s called a principal residence exclusion. This means that a certain portion of the capital gain is excluded from tax. Married couples can exclude $500,000 of capital gain from tax. Individuals or married couples filing a separate tax return can exclude $250,000 of gain from tax. In the example above, the entire $200,000 would be excluded from tax if this was your primary home. This means that you'd save at least $30,000 by using this exclusion (no capital gains tax and no 3.8% investment income tax)! • • TO QUALIFY FOR THIS EXCLUSION, YOU MUST LIVE IN THE HOME AS YOUR PRIMARY RESIDENCE FOR TWO OUT OF THE LAST FIVE YEARS. • YOU DON'T HAVE TO USE THE PROCEEDS TO BUY ANOTHER HOME. • YOU CAN USE THE EXCLUSION ONCE EVERY TWO YEARS. • If you have a large capital gain on your property, why don’t you consider selling it now, and pocketing the proceeds tax-free? Then, you can purchase another home and do it all over again because there’s no limit on how many times you can get this exclusion! You just have to wait 2 years in between each sale and make sure that you live in the property as your primary residence. • • THE EXCLUSION ONLY APPLIES TO PRIMARY HOMES • EXTRA CALCULATION APPLIES IF YOU CONVERT A RENTAL PROPERTY INTO A PRIMARY HOME.(SEE IRS PUBLICATION 523) • PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 523. • Source: CMPS Institute................... • Kristin Cooper • 916-390-4689 • Certified Mortgage Planner NMLS: 448315 • www.kristinloans.com • All loans subject to credit approval. Rates and fees subject to change.©2021 Finance of America Mortgage LLC is licensed nationwide | Equal Housing Opportunity | NMLS ID #1071 (www.nmlsconsumeraccess.org) | 300 Welsh Road, Building 5, Horsham, PA 19044 | (800) 355-5626 | AZ Mortgage Banker License #0910184 | Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act | Georgia Residential Mortgage Licensee #15499 | Kansas Licensed Mortgage Company | Licensed by the N.J. Department of Banking and Insurance | Licensed Mortgage Banker -- NYS Banking Department | Rhode Island Licensed Lender | Massachusetts Lender/Broker License MC1071.
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