CAPITAL GAINS TAXES

Ability to Exclude All or Part of the Gain from the Sale of a Personal Residence

An individual filer may exclude up to $250,000 of the gain on the sale of a personal residence. Joint filers are entitled to a $500,000 exclusion. The home must be owned and used as a personal residence for at least two of the last five years to qualify for the exclusion. There is no limit on the number of times homeowners may use this exclusion. The exclusion is available only once every two years, but there are several exceptions that could include:

• divorce, legal separation or death of a spouse;
• becoming eligible for unemployment compensation;
• a change in employment that makes it impossible to pay the mortgage or basic living expenses;
• multiple births resulting from the same pregnancy;
• damage to the home from natural disaster, act of war; or terrorism; and
• condemnation, seizure, or involuntary conversion of the property, such as foreclosure.

Example: The Wilson’s bought their home in 1982 for $250,000. In 1992, they added a family room, a deck and a pool for a total of $50,000. They lived in the home until they sold it this year for $900,000. Selling costs were $60,000.

Capital Gains Tax Rates on Investment Property

Long-term capital gains (property held for more than 12 months) are taxed at a maximum rate of 15 percent (5 percent for persons in the 15 percent ordinary income tax rate). When investment property us sold, any depreciation taken during the holding period is “recaptured” and is taxed at 25 percent.

Information contained herein is subject to change at any time by the IRS and should be verified by your accountant or tax professional.

Source:Dearborn Real Estate Education