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In a nutshell, if you have owned a home for five years and lived in it for at least two out of five years, or if you’ve owned the house for two years and lived in it the entire time, a single person has a $250,000 tax exemption. If you are married, as a couple, you have a $500,000 exemption. Any gains over those amounts are taxable. You should always discuss the sale of your home with a tax attorney, especially if you used the house for business or rented it out, as you may not be able to take the exemption on homes used for business or as a rental.
Before you can estimate how much tax you might owe, you need to calculate the cost basis for the property. Figure the tax by completing these steps:
Add the price you paid for the property to the cost of any significant improvements. Subtract any casualty and theft losses, closing costs you paid when you bought the house and allowable depreciation. You might be able to subtract some closing costs. If you inherited the property, the initial investment is the fair market value on the date of the death of the person who willed the house to you.
For gifted properties, if there is a gain, you use the donor’s adjusted basis in the cost basis equation. If there is a loss, the cost basis is the fair market value on the date you received the property as a gift or the donor’s adjusted basis, whichever is less.
Once you have the cost basis, subtract it from the sale price of the house. For example, if you paid $500,000 for your home and you are now selling it for $1,000,000, you have a capital gain of $500,000. If you are single, you will pay tax on $250,000. If you are married, the exclusion is $500,000, which wipes out the $500,000 profit.
You may be able to use the Section 1031 exchange if you are selling a home used for business or that was rented out as long as you buy another house for business or to rent out. The new purchase cannot be for personal use and the exchange must be for “like-kind.”
The regulations for a Section 1031 exchange are limited and may be confusing. Always retain a tax lawyer or accountant to help you with your taxes, especially if you are buying and selling an investment property. If you are selling a million dollar plus home and you use it as your personal residence, you should still contact a tax lawyer. Depending on your finances, the tax lawyer may be able to help you avoid some of the tax.
Ted draws energy and joy from building synergetic relationships with his Clients. Ted's nature is graciously gregarious and persevering; he's honest; and he's been dedicated to a substantial list of clientele throughout his 25 years in the hospitality business and almost two years as a REALTOR. His passion is creating a sincere, successful relationship with people.
Ted grew up in a family of Realtors in central Indiana, earned a degree in economics and philosophy from the University of Notre Dame, and jumped into all aspects of the restaurant business. His ensuing hospitality career path eventually led him into the Event Management Sales & Service role in hotels and quickly guided him to Los Angeles, San Francisco, and finally to a luxury resort in the Napa Valley, where he, his husband, and their dog have resided for almost a decade now.
The irony is not lost on Ted that his ‘growth’ journey has culminated in“living happily ever after” in an agricultural area with a small-town feel and sense of community strikingly reminiscent of his youth…and as a REALTOR nonetheless!