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Janeese Jackson's Blog

By Janeese Jackson | Broker in Portland, OR

Tax Laws Affecting Capital Gains on the Sale of Your Primary Residence!

Phillip Phillips - "Home"

One of the biggest "boons" of owning and living in a home is the home-sale exclusion. As of May 6th, 1997 the tax codes changed on the sale of a principal residence.  The "old rules" no longer existed!  The old "1034 Exchange" stated that you could defer gains by "buying up" every two years (purchasing a more expensive property) or take the over 55 years old one-time exclusion of $125,000.

Now we have provisions that if the property has been owned and used as a principal residence for two out of the last five years, you qualify for the following:

*  a single individual can take a $250,000 exclusion from his/her gain once every two years.

*  a married couple filing jointly can take a $500,000 exclusion from their gain once every two years.

Additionally, you don't have to "buy up" to qualify for the exclusion, you don't have to be living in the house at the time of the sale and the use of the property as a principal residence for two years does not have to be consecutive.  You can turn a rental house into your primary residence, making the sale of it eligible for the exclusion. This is accomplished when you meet the IRS use and ownership tests: You own and live in the home for two out of the five years before the sale.

Many people mistakenly believe that their gain is simply the profit on the sale.  Your gain is actually your home's selling price, minus deductible closing costs, selling costs and your tax basis in the property. (Your basis is the original purchase price, plus purchase expenses, plus the cost of capital improvements, minus any depreciation and minus any casualty losses or insurance payments).  Deductible closing costs include points or prepaid interest on your mortgage and your share of the prorated property taxes.

If you are selling investment property (and not converting it to a primary residence), see 1031 Exchanges!






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