by Flint Adam, Nolensville resident & Realtor®
Monday, September 26, 2016
Before we go any further, let me stress that I am not a tax-advisor or financial planner. If you – at present or in the future – are in a situation involving specific tax questions, it’s my advice that you seek out a professional.
My profession is real estate, and this blog will advise on the nuts and bolts of home selling and real estate capital gains.
Tax and Real Estate
We’re in an enviornment where more and more people could sell a home and net a big return! That’s great for most of us, especially following the rules introduced in 1997 that make it more profitable when you sell a home; but there are situations where the tax man cometh, so it’s best you understand how things can shake out.
Pre-1997 Real Estate Capital Gains Rules
Before May 7, 1997, take code stated that if you profited from the sale of your home, you must use that money to buy another, more expensive home within two years or be taxed on those profits.
A caveat to that rule was if you were 55 or older, you could take a one-time individual exemption up to $125,000.
Since the Tax Payer Relief Act of 1997 went into effect, it became much easier to sell your home and enjoy a tax-free profit – without so many strings attached.
How Do Real Estate Capital Gains Work?
The great news is many of you don’t have to worry about incurring capital gains on your home! Here are the thresholds:
- Single tax-filers can realize a profit up to $250,000 from their primary home sale before paying taxes.
- Married tax-filers can profit up to $500,000 before paying taxes.
So, as an example, let’s say you’re a married couple who bought a foreclosed Nolensville home in 2010 for $305,000. In 2016, you successfully sell it for $435,000, and after all settlement fees are paid and your home closes you net $100,000. This entire profit falls under the $500,000 capital gain threshold for married couples, so there is NO taxation!
Sounds pretty great, but what if a married couple bought a $1,000,000 Nolensville estate property in 2010, sold it today and netted $600,000 after settlement fees? Well, the first $500,000 in profit is tax free, however the extra $100,000 profit would incur a capital gains tax.
What Conditions Are There?
In order to meet all of the requirements for the capital gains exemption, the following must apply:
- The home must be your primary residence: The exemption does not apply to investment properties.
- You must live in this primary residence 2 out of the past 5 years: There is flexibility here – if you lived in the home for one year, then rented it out for three years, then lived in it again for one year, it still meets the requirement. Even better – you can use this condition over and over again for subsequent purchases.
- A vacation home does NOT count: remember – it has to be your primary home! Even if you have lived in a vacation home to what amounts as 2 years over the past 5, this residence is still considered a secondary home.
- It pays, er, rather SAVES to get married: saying “I Do” doubles up your exemption! (But if your new spouse previously used an exemption within the past two years on their own home sale, things get murky. Consult a tax pro here.)
- The wealthy have different rules: the 2008 Housing and Economic Recovery Act closed a tax loophole benefiting wealthy homeowners. Until then, homeowners with two or more homes could sell one, move to the next and make it their primary residence and then sell it without paying much, if any, capital gains tax. Now, the modification excludes “non qualified use”. Again, consult with a tax specialist for more detail if you think this may affect you.
- Active and veteran military get better exclusions: In 2003, the government created a military tax exclusion since those serving our country often times move in less than 2 years. In fact, there are lots of great Tennessee tax benefits for serving our country.
The Net Effect…
What you can exclude is not simply related to what your home sold for. If you made capital improvements (like a kitchen renovation or unfinished space that was converted into another bedroom) these can be applied toward your tax basis. (Be aware, though, there is a difference between improvements and repairs for tax purposes. Consult your tax pro for more on this subject.)
Keep receipts for any improvements you make to your home – these records are important when calculating your basis and determining an actual profit.
The government wants you to realize the dream of homeownership and has created exemptions that make this profitable for you. It’s a good time to buy and sell real estate in our country – take advantage!
Flint Adam and his family live in Nolensville’s Bent Creek community and he proudly focuses his real estate practice right here in Nolensville. Call him today at 615-500-6393 and discuss how he can help solve your real estate buying and selling needs.