Capital Gains Tax in Real Estate

Real Estate is one of the most tax-friendly investment vehicles to be found.  In addition to the mortgage interest deduction, when you sell your home, you may be allowed to keep the gain without paying any capital gains tax.  

Many people are surprised to hear this, since this law changed in the late ’90’s and was not always the case.  

With anything tax related, there are a few caveats:

1.  The home must be your primary residence.  Second homes do not count.  

2.  You need to have lived in the home for at least 2 years, or two of the last five years.  For instance, if you live in your home for two years, and rent it out for four years, you would not qualify for this exemption.  

3.  A single taxpayer can exempt up to a $250,000 gain or married tax filers up to $500,000 gain.  So if you purchase your home for $100,000, and you are able to sell it for $700,000, and you file jointly with your spouse, you should be able to exempt the first $500,000 but the remaining $100,000 would carry a tax burden.  

As another example, say you bought a median priced home in Denver at $400,000 two years ago.  It appreciated around 10% per year.  So after the first year it was worth $440,000, and then after the second year it was worth $484,000 using this simple hypothetical calculation.  

You then sell your home for $484,000, pay the associated transactional fees (make sure to employ me for this if you want to maximize your proceeds) and pocket the gain entirely tax free.  

With any other investment that appreciated, you’d be on the hook for long term capital gains tax which is around 15%-20% depending on your tax bracket.  

As always, it is important to consult with a qualified tax professional, because your situation may differ, but many homeowners are eligible to receive their gain tax free.  

On the flip side, if you sell your home at the 1 year 10 month mark, you may be on the hook for a fairly big tax burden and you should plan accordingly.  

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About Jeff Summerhill

Jeff is equally passionate about the x's and o's of real estate, and the emotional, more heart-felt side of real estate like people, places, and design. He enjoys getting up to the mountains and skiing, hiking, and biking whenever time permits.

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