We are often asked, “what is my tax liability when I sell my home?”. Also, “do I still have 2 years to purchase a replacement property?”
The IRS rules were changed by Congress in 1997, but the language used has often left folks confused about this important issue. Seattle Sunday Times syndicated columnist Scott Burns [Business/Your Money] wrote an excellent piece on exactly what the rules are. Please read his column for a complete understanding of the history of this tax law. We have summarized the existing law as it stands today:
1. Each income tax return for a single person is entitled to tax-free $250,000 gain as a result of a real estate sale.
2. Those filing their tax return jointly are entitled to a $500,000 tax-free gain.
3. The only requirement for the above exemptions are that the filer(s) must have resided in the subject property at least 2 out of the 5 years of ownership prior to the sale of said property.
4. It is still important to know your cost basis in case your gain might exceed $250,000 (single) or $500,000 (joint). If your gain exceeds the exemption amount, you will pay capital gains tax on the excess income. Capital gains tax is currently 15%.
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Hi Bill & Diana: This article is good except it doesn’t talk about the results of flipping (you could be declared a dealer with everything non-tax deductible, no capital gains, etc. on ANY of your properties). Nor does it talk about investment real estate in general and the passive activity loss rules, or even the ramifications of LLC’s.
I’d recommend you interview a knowledgeable CPA and post that at your site. Knowledgre from an independent knowledgeable resource always ads value. I have some tools which may be of help to you in this regard.
Blessings,
Christine