With the increase of property values, many people are wondering about the capital gains implications of selling a home.
Detailed below is information that you will find helpful for your main residence, a second home, and a rental property.
Selling your main home for more than you paid generally does not result in a taxable capital gain. The IRS let’s taxpayers exclude up to $250,000 ($500,000 for married taxpayers filing jointly) of gains if the home was your primary residence for two of the last five years. You can never claim a loss on the sale of your main home. A point of clarification, taxpayers used to be able to exclude taxable gains if the proceeds were rolled into the purchase of a new home. This rule is no longer in effect as of May 7, 1997.
If you sell your second home you will have to pay taxes if you have a gain. The gain is calculated based on your purchase basis and your sale basis. Your purchase basis is your purchase price plus closing costs plus any capital improvements you’ve made. Your selling basis is the sales price minus any commissions related to the sale. Like a personal residence sale, you can never take a loss on the sale of your second home. To qualify as a second home, the home must have been rented for less than 15 days in that year.
The taxation of rental property sales is more complex. The basis calculations are similar. Gains are taxable and a portion of the gain will be taxed at ordinary rates. The amount taxed at ordinary rates is generally the amount of depreciation claimed, with the remaining portion taxed at capital rates. Unlike main or second homes, losses on the sale of rental property are allowed.
Hopefully this will help you clarify what your tax consequences are when selling a home!