Capital gains occurs when you sell real estate for more than you paid for it. The difference between the original sales purchase price paid and the new sales price is the gain. In other words:
New sales price, minus purchase price of the property, minus the cost of sale = the amount of gain on the property.
This calculation can mean that most all sellers that are selling their home in Northern Colorado would show a gain on their property. Our market has seen nice appreciation of property values in recent years and this can lead to nice gain when it comes time to sell. It is great to sell your home for top dollar, but the IRS may want a piece of the gain that you receive.
When do you have to pay capital gains tax? The government allows you to exclude $250,000 in gain for an individual home seller and exclude $500,000 in gain for a married couple. For example, lets say that you bought a property 10 years ago for $250,000 and sold the property for $850,000. You are a married couple, filling your taxes jointly, selling your home that you have lived in the home for all of the last 10 years. You subtract the $250,000 from the $850,00 and the number is $600,000. You are allowed by the IRS to have $500,000 in gain so you will only pay taxes on the $100,000 which is over the $500,000. How bad might the taxes on that $100,000 in gain be. There are factors that the IRS takes into account when figuring but for a rough estimate the tax could be between 10 and 20 %.
In order to be able to exclude the gain, like in the example above you need to have:
- Lived in the home for at least 2 of the last 5 years.
- The home needs to have been your primary residence.
- You can not have claimed that you sold a primary residence in the last two year period.
- If you are selling your home in less than two years, but moving due to work, health or an unforeseeable event, you still might qualify!
- You also may be able to minimize your capital gains tax if you are able to show receipts for home improvements.
If this sounds complicated it really might be. This might be the year to have a CPA do your taxes. The money spent to have a professional review your tax situation might be small in comparison to the amount you save in taxes paid.