Money Girl answers 3 FAQs about real estate to help you succeed whether you're a buyer, seller, or investor—or even if you just plan to become one someday.
It’s summertime, a busy season for real estate sales. That’s probably why I recently received several questions about buying and selling homes.
In this episode, I’ll answer 3 questions that will help whether you're a real estate buyer, seller, or investor, or plan to be one someday. I'll also include many resources to help you learn more.
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How to Sell Your Home Tax Free
Real Estate Question #1: An anonymous Money Girl reader asks, “I understand that a married couple can sell their home tax free if they have a capital gain of up to $500,000. Does that benefit apply to every home you sell or is it just a one-time exclusion?”
Answer: First, I want to clarify what a capital gain is exactly. You probably know that you have to pay ordinary income tax when you make money from a job, business, or bank savings account.
Well, you also have to pay tax on profit that you make from an investment or the sale of a capital asset, such as real estate, stocks, mutual funds, and many other types of investments.
If you sell an investment or home for a profit, you have a capital gain. And if you lose money on the sale of a capital asset, you have a capital loss.
Fortunately, there is a gift in the federal tax code that allows you to skip paying some or all of the capital gain tax when you sell a home. The good news is that this jewel of a tax break applies to every home you sell for your entire lifetime—as long as you comply with the rules, which I’ll cover in a moment.
But the IRS wasn’t always so generous. The home sale capital gains exclusion used to only apply if you bought a more expensive home within two years. You were also only allowed a once-in-a-lifetime exclusion of up to $125,000 if you were age 55 or older.
Now, the rules are much more favorable because no matter your age, you can sell your home, pay no tax on some or all of the gain, and do anything you want with the profit. The capital gains tax exclusion tops the list as one of the best tax breaks for Americans.
The capital gains tax exclusion tops the list as one of the best tax breaks for Americans.
Let’s say you purchased your home for $200,000 in 2010. Now, due to market appreciation, you’re able to sell it this year for $300,000 after all closing costs and expenses. For the sake of this example, assume your purchase price and your cost basis for tax purposes are the same, which would give you a capital gain of $100,000.
How to Avoid Capital Gains Tax on Real Estate
Ordinarily, as I previously mentioned, when you sell an asset for a profit, you owe tax on all of the gain. However, if you follow these 5 rules you can avoid some or all of the capital gains tax on real estate sales: