How to Prepare for Capital Gains on a Luxury Home

Posted by Marc Rasmussen on Friday, December 15th, 2017 at 10:30am.

How to Prepare for Capital Gains on a Luxury HomeCapital gains on a luxury home can reach epic proportions, which is why sellers should be more aware of which rules apply to them and when. The US government has attempted to make several concessions for sellers to allow them more freedom within the real estate market, but the rules and exceptions to the rules can be tricky. When preparing to sell a home, see how luxury homes are impacted by capital gains, and what sellers can do to prepare themselves when it comes to structuring their capital gains.

Capital Gains for Home Sales

Capital gains refer to the appreciation value of an asset over time. In the simplest scenario, if a home is purchased for $500,000, and sold for $1 million, then the capital gains are $500,000 minus certain costs. All fees charged to sellers (e.g., real estate agent fees, closing costs, etc.) can be deducted from capital gains. Sellers can even deduct the closing costs they paid at the time they purchased the home.

In addition, home improvements that increased the value of the home can also be deducted. While the rules the IRS has set for home improvements are a tad hazy, it generally refers to major renovations of the home as opposed to standard maintenance. For example, if the seller added a new solarium to their home, then this would be deducted. If they replaced worn siding or a rotting fence, these fees would not be deducted.

How Capital Gains Are Taxed

Capital gains are thought of as profits by the government and are taxed on a progressive scale based on income. Those in the lowest income brackets don't have to pay any taxes on capital gains. Sellers of luxury homes generally sit at the top of their income bracket, which is taxed at a full 20 percent. Those who fall somewhere in the middle of the income scale will pay 15 percent. Keep in mind that the net gain on the home may push certain people up into the higher tax brackets. Any home that has taken a loss on the property due to a depreciating market or a high-cost renovation will not have to pay any capital gains tax.

Capital Gains for a Luxury Home

Capital gains taxes on a luxury Bradenton home sale can sometimes be waived, depending on what the seller did with the property and when they sold it. For example, if a seller only keeps the property for between 2 and 5 years, they can waive up to $250,000 worth of capital gains. If the home was purchased as a joint ownership between two spouses, then up to $500,000 can be excluded from the capital gains tax. For sellers to qualify, they must have used the home as their primary residence for two years or more.

Extenuating Circumstances

Sellers are still allowed to rent out their property for part of the time they own the home. Should a seller move into a home for a year, rent it for two years, and then move back in for a year before finally selling, this would still technically qualify for the tax waiver. To prevent home flippers from taking advantage of this rule, sellers are not allowed to waive the capital gains tax if they had done so previously within the last two years of sales. Finally, if sellers purchase a similar property to their original home in terms of price, then they may qualify for a 1031 exchange. In this case, all profits are put back into a new home for the seller with no resulting net gain.

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