Tax Benefits of Owning a Home
In this article, you will find:
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Capital Gains Exclusion
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Capital gains are the profits from the sale of an investment or asset. Tax on this gain is usually due the year the asset is sold.
Pocket Change
The 1997 Taxpayer Relief Act was great news to persons under age 55 who wanted to sell their homes and buy smaller ones. Before this act, people who owned their homes for many years often had to pay high capital gains taxes at sale time.
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A capital gains exclusion is an exclusion to the practice of taxing capital gains. It applies to those who sell their homes and are within the parameters set by the government: up to a $500,000 sum if married, $250,000 if single.
You've just moved into your house, so this section on capital gains might be a little premature. This information will be helpful someday, though. A capital gain occurs when you sell your home at a profit. Say you buy it for $100,000, keep it for a while, and then sell it for $200,000. You've made a $100,000 profit or capital gain. Most profits, such as those on many investments, are taxed for capital gains purposes. A portion of the capital gains from selling your home, however, is not.
Capital gains used to be bad news for taxpayers, who saw a big bite taken out of the money they made on the sale of a house. Fortunately, the Taxpayer Relief Act of 1997 made big changes in the capital gains taxes you pay on the sale of your house. The 1997 law says you can take a $500,000 exclusion on your income tax if you're married and filing jointly, or a $250,000 exclusion if you're single.
You can file for the capital gains exclusion every two years at any age, as long as you've used the property as your principal residence for at least two of the last five years. If you only own your house for one year, you can take a partial (50 percent) exemption. If you have to move because of unexpected or uncontrollable reasons, such as a job transfer or health reasons, you get to take the total exemption. It won't be prorated, even if you haven't lived in the house for two years.
Don't rush out and sell your house now that we told you about the $500,000 exemption. It sounds like a huge amount to be sure, but you'd be surprised at how quickly costs add up. Always save any receipts associated with fixing up or improving your house. This is smart in case you need them for an insurance claim. Saving the receipts also gives you a record of capital improvements for the calculation of any gain for your state income tax return. Note that although the IRS allows a $500,000 exclusion for capital gains on a house sale, your state's allowable exclusion may be considerably less.