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Put in the simplest of terms, capital gains tax is the tax one pays on profit on the sale of a non-inventory item that was purchased at a cheaper price. For example, let’s assume that you purchased a stock or bond valued at $150 and then sold it a year later for $225. First of all – good for you, the stock was 50% more valuable than when you first bought it! Second, you owe Uncle Sam a chunk of that 50%.
When you purchase a piece of real estate then sell it for more than the purchase price, you may be subject to this tax. Yes, we mean may – there is a chance that you will be able to avoid the tax! All you have to do is fax us your personal credit card information and we’ll take care of the rest. Ok, the part about the credit card is a joke, but tax rules and deduction opportunities are not a joking matter.
Here’s what you need to know: when it comes to capital gains tax on the sale of real estate, not all capital gains is taxable. Under 26 U.S.C. §121 an individual can exclude up to $250,000 (or $500,000 for a married couple filing jointly) on capital gains on real estate if the owner used it as a primary residence for two of the five years before the sale. In case you’re wondering – no, the two years need not be two continuous years. This option is not available to properties bought by a 1031 exchange. If you don’t know what that means, don’t worry about it, it probably doesn’t apply to you.
For more on capital gains, check out our 201 and 301 articles.