When you sell your home, how are you taxed on the proceeds of that sale? Especially in a rapidly appreciating market like ours, the topic of capital gains tax is important because there’s big money at stake for a lot of homeowners. Let’s start with the simplest and most vital piece of information: As long as you’ve lived in your primary residence for at least two years or more, you’re eligible for a capital gains tax exemption. If you’re single, that exemption is for up to $250,000; if you’re married, the max is $500,000.
I stress “primary residence” because there’s a different process for sidestepping capital gains tax when you’re selling investment properties (we’ll cover 1031 exchanges in a bit). Now, there are some common exceptions to this primary residence exemption rule for capital gains tax. For example, if you’re forced to sell your home in under two years due to a hardship/special circumstance such as divorce or job relocation, you may still qualify for the exemption. So long as you meet the criteria (two full years of residency), you can claim it as many times as you want. In any case, talk to your accountant, as they’ll be able to advise you more precisely on those matters.
Some investors will try to buy three or four houses consecutively, move into the last one, live there for two years to claim their primary residence exemption, then repeat the process retroactively until they’ve cashed out on all of their investments. As you can imagine, though, there are special rules that govern capital gains tax obligation in those complicated scenarios. Thankfully, things are pretty simple if you just have one primary residence.
If you own an investment property, you can do a 1031 exchange, which allows you to take the full amount and roll it into another property without getting taxed. 1031 exchanges are for investment properties only—not primary residences.
If you have any questions about maximizing your equity when selling and strengthening your position as a buyer, reach out to us by phone or email. We’re happy to be your premier real estate resource and connect you with the trusted professionals (lenders, inspectors, handymen CPAs, etc.) on whose expertise we depend.