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Capital Gains & Your Principal Residence

Posted November 3, 2017
Capital Gains & Your Principal Residence

What​ are​ ​capital​ ​gains?

Capital gains occur when you sell an asset for more than you spent to acquire it. In most
cases, when this happens, a capital gain tax can apply.

What​ ​qualifies​ ​as​ ​an​ ​asset?

According to the IRS, just about everything you own is an asset – stocks, cars, property, even
big electronics.

So,​ ​why​ ​are​ ​we​ ​talking​ ​about​ ​it?

Well, the biggest asset most people have is their home. With the current market benefitting
sellers, many people are in the position to sell their home for more than they paid for it –
potentially getting hit with capital gains taxes. However, there are some exceptions.

The tax code allows you to partially or fully exclude capital gains from your primary residence if
you meet three conditions:

1. You owned the home for a minimum of two years in the five-year period before the sale.

2. You owned AND occupied that home for two of the last five years (the two years DO NOT
have to be consecutive.)

3. You haven’t excluded the gain from another home sale in the two-year period before the sale
(You can use this exception multiple times in a lifetime, however, not more than once every two
years.)

If you meet these three conditions, you can exclude up to $250,000 of your gain if you’re single,
$500,000 if you’re married, filing jointly.

Let’s​ ​look​ ​at​ ​an​ ​oversimplified​ ​example:

  • A married couple purchases a home on 1/1/2010 for $400,000 with closing costs of $10,000.
  • The total basis of the home is $410,000. They live in the house through 12/31/2016 when it is
    sold for $750,000 with closing costs of $60,000.
  • This resulted in a capital gain of $280,000.
  • Since the property was used as the principal residence for two or more of the last five years, the
    gain can be 100% excluded.
  • The funds are not required to be reinvested into another home, and this transaction would need to
    be reported on the their tax return with an adjustment for the gain to be zero.

Contact a JG Real Estate or Michael to discuss further how this tax saving strategy may
be employed to your benefit.

 

About the Author
Michael Casey joined Savran Benson, LLP. in October 2011 and became a partner in January 2016. Mr. Casey
has over 15 years of related experience and specializes in tax consulting and compliance for healthcare and real
estate businesses. Prior to joining the firm, he worked with a Conshohocken based public accounting firm
where he managed and assisted in training the accounting staff while focusing on business development. His
experience working in a traditional accounting and tax role for closely held businesses has allowed Mr. Casey
to expand and develop client relationships.

 

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