Most of you probably know that a capital gain applies to the sale of a home. Hopefully you also know that there is a capital gains exclusion that may be used in certain situations. What is a capital gain? A capital gain is the appreciation on an asset. What this means is that you pay tax on the profit of your home when you sell. Letâ€™s say you purchased a house for $300,000 and you sell it for $450,000 sometime in the future. You are taxed on the net difference, or $150,000. This can mean a lot of taxes. It becomes really important to know if you qualify for the capital gains exclusion and make plans well in advance of the sale if possible.
In 2012, for example, individuals can exclude up to $250,000 of profit on the sale of a home, assuming it was used as your primary residence and you lived in the home for a minimum of two years. This amount doubles (up to $500,000) if you are a married couple. Keep in mind that the two years do not have to be consecutive. So, if you were living in the house for at least 24 months or 730 days, within a five-year period, you qualify for the exclusion. Short summer vacations count as a period of use but longer breaks like a one-year sabbatical does not. The good news is that this exclusion is unlimited and you can use it each time you sell your home, but only once every two years. (There are some exceptions, such as health issues, change in employment or unforeseen circumstances, so be sure to ask your accountant.)
In addition to the tax exclusion, you may also lower your capital gains by documenting certain expenses or improvements you have done to the home during the time you lived in it. Per the IRS, a tax-acceptable improvement must add value to your home and prolong your homeâ€™s useful life. Most folks with common sense can figure this out. Just to be clear, you canâ€™t compare putting up fancy wallpaper the same as adding a bathroom. Improvements such as putting in a pool, installing new heating and/or air conditioning, upgrading to copper plumbing, replacing the roof, adding a deck, etc., are all things that meet IRS requirements.
No doubt, this is good information on the home-front. As always, be sure to check with your tax advisor before assuming any tax exclusion.
If you have any questions on Malibu Real Estate, please do not hesitate to contact 4 Malibu Real Estate Partners at 310.456.3655 or at Info@4Malibu.com.Â Visit http://www.4Malibu.com.Â