Walpole CPA & Consultants Santa Barbara
Gain on Sale of Personal Residence
Do I have to pay tax on the gain from the sale of my house?
Probably not.
First, we need to understand how much gain there was on the sale. Your gain is calculated as the net sales price minus your basis. Generally, your basis is how much you invested in the house.
Example: You bought your house five years ago for $100,000. You sold it this year for $100,000. You do not have any gain at all.
Second example: You bought your house five years ago for $100,000. You spent another $10,000 adding a new swimming pool to the house. Your basis is $110,000. You sold it this year for $130,000. Your gain is $20,000.
The general rule is that you don't have to pay tax on the gain on sale of your personal residence unless the gain exceeds $250,000 for singles or $500,000 for married couples.
Of course there are a few requirements and exceptions:
1. You must have owned and lived in the house as your principal residence for at least two of the previous five years. There are limited exceptions for unexpected moves based upon health conditions or job changes.
2. You must not have excluded the gain on the sale of another principal residence within the last two years. In other words, you can only do this once every two years.
3. If you rented out or used the house for business within the last two years, you must report the depreciation on the house as income and may have to report a percentage of the house gain as capital gain. If this personal residence was acquired via a 1031 exchange, then additional holding rules (5 years instead of 2 years) will apply.
Bottom line: Most people will not owe tax on the gain on sale of their personal residence. If you have been renting out your house or using it for business, the depreciation recapture rules and percentage gain rules are complex and you should probably seek professional tax assistance. The old rules where you were allowed to re-invest the proceeds on the sale of your prior home into your new home are not applicable anymore.
Tax tip: If you are going to sell your house within the next two years and you are currently renting out your house or using it for business, you should consider stopping the rental or business activity. This is especially true if the gain on the sale of the house will be sizeable. Stopping the rental or business activity in the home may cost you a few tax dollars for the next two years, but it may save you a lot of tax dollars when you sell the home.
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© 2009 Walpole & Co., LLP. All Rights Reserved.
Probably not.
First, we need to understand how much gain there was on the sale. Your gain is calculated as the net sales price minus your basis. Generally, your basis is how much you invested in the house.
Example: You bought your house five years ago for $100,000. You sold it this year for $100,000. You do not have any gain at all.
Second example: You bought your house five years ago for $100,000. You spent another $10,000 adding a new swimming pool to the house. Your basis is $110,000. You sold it this year for $130,000. Your gain is $20,000.
The general rule is that you don't have to pay tax on the gain on sale of your personal residence unless the gain exceeds $250,000 for singles or $500,000 for married couples.
Of course there are a few requirements and exceptions:
1. You must have owned and lived in the house as your principal residence for at least two of the previous five years. There are limited exceptions for unexpected moves based upon health conditions or job changes.
2. You must not have excluded the gain on the sale of another principal residence within the last two years. In other words, you can only do this once every two years.
3. If you rented out or used the house for business within the last two years, you must report the depreciation on the house as income and may have to report a percentage of the house gain as capital gain. If this personal residence was acquired via a 1031 exchange, then additional holding rules (5 years instead of 2 years) will apply.
Bottom line: Most people will not owe tax on the gain on sale of their personal residence. If you have been renting out your house or using it for business, the depreciation recapture rules and percentage gain rules are complex and you should probably seek professional tax assistance. The old rules where you were allowed to re-invest the proceeds on the sale of your prior home into your new home are not applicable anymore.
Tax tip: If you are going to sell your house within the next two years and you are currently renting out your house or using it for business, you should consider stopping the rental or business activity. This is especially true if the gain on the sale of the house will be sizeable. Stopping the rental or business activity in the home may cost you a few tax dollars for the next two years, but it may save you a lot of tax dollars when you sell the home.
BACK >
© 2009 Walpole & Co., LLP. All Rights Reserved.
