Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Your main home or investment property is no exception. When you sell a capital asset, such as your home, the difference between the amount you sell it for and your basis, which is usually what you paid for it, is capital gains or capital loss. While you must report all capital gains, you may deduct only your capital losses on investment property, not personal property.
What are short-term vs. long-term capital gains and losses?
Capital gains and loses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it for more than one year, your capital gains or loss is long-term. If you hold it one year or less, then it is considered short-term.
What is the basis and how is it determined?
You need the basis to calculate any gain or loss. If you purchased or built it, then it is your initial cost. If you acquired it through inheritance or gift, then you need to know the adjusted basis and the fair market value at the time of transfer to you.
What are current capital gains rates?
The maximum tax rate on net capital gain (net long-term gain reduced by net short-term capital loss) in now 15%. Gains that are taxed at a regular rate of 10% or 15% are now 5% for property sold or otherwise disposed of after May 5, 2003.
Is any of the profit from selling my home not taxable?
As a single homeowner, you can exclude up to $250,000 of capital gains. Married, filing jointly, together can exclude up to $500,000. Married, filing separately, each $250,000.
Is this a one-time exclusion?
The exclusion is allowed on principal residence, as often as every two years.
What is the ownership and usage criterion for claiming the exclusion?
You must have owned and lived in your home as primary residence for a combined period of at least two of the last five years.
What is real estate depreciation recapture?
Depreciation is the decrease in the value of property over the time the property is used. Depreciation recapture is when a property used for business is sold at a gain; if accelerated depreciation has been claimed, you may be required to pay tax at ordinary income rate to the extent of the excess accelerated depreciation.
We own a rental property. If we live in it as our main home for tow years, can we sell it and not pay capital gains tax?
You may exclude the allowed capital gain from selling your main home which you have also used for business or rental property if you meet the ownership criteria in the previous paragraph. However, if you took depreciation on the property used for business or rental, you cannot exclude the part of your Gin equal to the depreciation taken or allowable for the period after May 1997.