New Home Finance Guide: Captial Gains Tax

So what is capital gains tax (CGT) anyway? A capital gains tax is a tax charged on capital gains - profit that results from the appreciation of a capital asset over it's purchase price.

According to the US Tax Code's section 1222 - gain from the sale of a capital asset (such as property) is considered a "capital gain". The IRS Tax Topic 409 states that just about everything you own or use for personal or investment purposes is considered a capital asset.

Under the current tax laws, home sellers qualify for a substantial tax break. A significant amount of profits (capital gains) on the sale of a home are excluded from taxation: up to $250,000 for single taxpayers and $500,000 for married folks filing jointly.

If you have a gain from the sale of your main home, according to Topic 701, you may be able to exclude from income all or a portion of the gain. For more information on this gain exclusion, you can refer to Publication 523. The exclusion may be allowed each time you sell your main home, but generally no more frequently than two years. (You can't deduct a loss from the sale of your main home).

The IRS says, that in order to qualify for this capital gains exclusion, you must have owned your home and used it for your main home for at least two out of the five years prior to it's sale. The two years of ownership/use out of the five years, ending on the date of the sale, doesn't have to be continuous.

House sellers can no longer "roll over" profits from the sale of one home into the purchase of a more expensive home to avoid taxation. Most house sale profits don't come close to the new exclusion limits.

There are homeowners who live in higher cost areas and have owned their property for many years, and whose gains exceed the $250,000 or $500,000 limits - who have lost the ability to "roll over" these profits into a higher priced home. When they sell, they'll owe tax on whatever profits exceed their exclusion limit.

Before you sell your home, understand the financial ramifications of the sale. Brief yourself on the tax laws pertaining to taxation on capital gains from the sale of a capital asset - your property.