Capitial Gains Primary Residence exclusion.

HOW TO GET THE PRIMARY RESIDENCE CAPITAL GAINS TAX EXCLUSION

In order to understand capital gain, we first need to understand tax basis. Your tax basis is the cost of buying, building or improving the property. Assume you pay $200,000 for a property. You incur $5,000 in closing costs. Then you spend $45,000 on home improvements. In that case, your tax basis would be $250,000. That’s what it cost you to buy and improve the property.

Assume you later sell the property for $500,000. You incur $50,000 in sales commissions, transfer taxes, and other sales expenses. You then subtract your $250,000 basis. Your capital gain would be $200,000.

Once you figure out your capital gain on a property, the next step is to calculate your taxes. In our example, if you earn a $200,000 profit, you would likely owe $30,000 in capital gains taxes because the capital gains tax rate is currently 15% for most taxpayers.

In 2013, there was an additional 3.8% net investment income tax that was added by the federal government to help pay for changes to Medicare. This new tax applies to single taxpayers who earn more than $200,000, or married taxpayers who earn more than $250,000. You may need to pay an additional $7,600 investment income tax in this scenario.

THE PRIMARY RESIDENCE EXCLUSION
If the property is your primary residence, you have what’s called a principal residence exclusion. This means that a certain portion of the capital gain is excluded from tax. Married couples can exclude $500,000 of capital gain from tax. Individuals or married couples filing a separate tax return can exclude $250,000 of gain from tax. In the example above, the entire $200,000 would be excluded from tax if this was your primary home. This means that you'd save at least $30,000 by using this exclusion (no capital gains tax and no 3.8% investment income tax)!

TO QUALIFY FOR THIS EXCLUSION, YOU MUST LIVE IN THE HOME AS YOUR PRIMARY RESIDENCE FOR TWO OUT OF THE LAST FIVE YEARS.

YOU DON'T HAVE TO USE THE PROCEEDS TO BUY ANOTHER HOME.

YOU CAN USE THE EXCLUSION ONCE EVERY TWO YEARS.
If you have a large capital gain on your property, why don’t you consider selling it now, and pocketing the proceeds tax-free? Then, you can purchase another home and do it all over again because there’s no limit on how many times you can get this exclusion! You just have to wait 2 years in between each sale and make sure that you live in the property as your primary residence.

THE EXCLUSION ONLY APPLIES TO PRIMARY HOMES

EXTRA CALCULATION APPLIES IF YOU CONVERT A RENTAL PROPERTY INTO A PRIMARY HOME.(SEE IRS PUBLICATION 523)

PLEASE NOTE: THIS LETTER AND OVERVIEW IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE LEGAL, TAX, OR FINANCIAL ADVICE. PLEASE CONSULT WITH A QUALIFIED TAX ADVISOR FOR SPECIFIC ADVICE PERTAINING TO YOUR SITUATION. FOR MORE INFORMATION ON ANY OF THESE ITEMS, PLEASE REFERENCE IRS PUBLICATION 523.

Source: CMPS Institute...................
Kristin Cooper
916-390-4689
Certified Mortgage Planner NMLS: 448315

[danzdog]

Best cost basis cap gains video I have seen. Simple and to the point. 👏

[CS-puti]

This is exactly I’m trying to find out now. And you described it very well. Thank you so much; you helped me so much with this video.

[dubbyfresh]

Awesome work. Thanks for sharing your talent.

[jaiderariza]

It is confusing the 2 out of 5 years... does it mean we need to own the property for at least 5 years or not? For example if I bought a new construction home and I am living in it for 2 years, can I sell it and avoid capital gain tax? or do I have to keep it for 5 years?

[HillCountryBluebonnet]

My question is related to whether there are any capital gains tax exclusions if the proceeds are to be used to pay for a skilled/assisted living facility

[rsanchez]

Hello! Thank you for your video. We have lived in our house for 12 years we found a house we want to renovate to move into. After moving to the new house (which will be my primary residence). I want to fix my existing primary residence and sell it. Do I need to pay capital gain taxes if I sell my property within one year? If I qualify for the "2 out of 5 rule, " do I need to report this when I do my taxes or it is not necessary? Thank you very much for your video! Have a blessed day!

[timperkinz]

What if we own 2 homes and live in them nearly equally during the year over the 5 year time frame? Can we claim one of them as primary when we go to sell?

[davidjewett]

Thanks so much for your discussion. I have a question:

What happens when you live in the house, make improvements, and then turn it into a rental, whereby you sell it as a rental property?

[ericmacmartin]

We are renting out our previous residence we lived in for 2.5 years. At 5 years of owning, I plan to sell. Will I be excluded from capital gains tax for any gain less depreciation for gains 500k or less if married filing jointly?

[lnkinc]

Hi Kristen thank you for the video I do have a question if they rented out the house for two of the five years will they still qualify for the exclusion.
Also does it have to be 5 years total owning the property

[CS-puti]

One question: if you have a loan balance (in my case, I have about $100, 000 to go), do you subtract that before calculating the capital gain tax or after?
Awesome video! Thank you so much!

[Toyotaguy.]

What if I’m filing married but filing separate and we did live there two out of five years to have to pay capital gains would it be under the $250, 000 exclusion or would we still have to file joint this year to get any sort of exclusion?

[a.miller]

What qualifies as a year... If i start renting it out August of 2023... Do i count August to August 2024 as a year or is Jan to December the "year". And if i live there majority of that year it counts (Jan to August)?

[skhan]

There is hardly any info on my situation where ever i look. I got a 1099-s for selling a portion of land of my primary residence in California . How do i report it. Or could it be that the proceeds are means to offset the cost basis of the main house when comes time to sell the main house at a future date.

[marisolalcantara]

Hi,
I love your explanation. However, what happens when you sell your primary, qualify for the exclusion but you still receive a 1099s? This is my case. Sold a house for 163000 but bought it for 98000.

[kimla]

Question. I bought my home back in 1998 for $110K. Now sold for $285K. I’m single n live there over 20 years. Also my primary home. Do I exempt capital gain for single $250K??? Please help

[claudiodominguez.]

Hi, my mom wants to sell her home she has lived in for 49 years, she's 84 years old on S.S. She bought the house for under 40K and it's now valued at over 500K. Other than the 250K exemption is there any other tax exemption ? It's a lake front property in a great location in Florida and this niche market has gone up considerably.

[bayareacarnatic]

what if the house was rented for few yrs and then becmae a primary resident (2Yrs). Ist he depreciation that we took for rental subtracted from cost basis?

[hecmacias]

KRISTIN, From what I researched your tax bracket has quite a factor if you pay federal and in CA state taxes too. You might not have any federal taxes if you don't make more than 42k and 2% state taxes in CA in that tax bracket! Does that sound correct? Of course, that's if you made more that the Fed/State excludes!

[ArkDiabLord]

Holy molly, sale closing cost is $50, 000? Please verify if that is correct.