If you sold your home last year, Laurence Smith and associates at Book 2 Tax want to help you take advantage of the Home Sale Gain Exclusion. Our knowledgeable staff of accountants and tax preparers understand the rules related to this tax event and can work to get you the largest refund possible. Filing an income tax return can be complicated, especially if you are found to have made money on the sale of your home. To avoid overpaying on your taxes, find a tax professional who understands the details of the Gain Exclusion.
What is a Capital Gain?
The term capital gain is often associated with the wealthy or corporate entity. However, every single tax payer can receive a capital gain. Whenever you sell an item for more than you paid for it, you are earning a capital gain. That gain, the amount of money you made on the transaction, is subject to the capital gain tax. This means that the government has the right to tax a percentage of that money you earned. The sale of many different items can result in a capital gain, including stocks, investments, personal property, and homes or residences. As an example, if you purchase a used car for $1,000 and then sell that car for $5,000, you have made a capital gain of $4,000. However, any fees you paid toward that vehicle will be considered. If you restored the car, spending $2,000, that amount is decreased from your total capital gain amount. Any fees paid toward the betterment or sale of the asset are deemed a part of the cost basis.
The car sale example is only a small idea of the amount of money that you could be taxed on, whereas the sale of a home can result in a much larger capital gain. We recommend that you find a tax preparer or an accountant who is well versed in capital gains taxes. This is the only way to ensure that your taxation rate is lowered to as little as possible.
What is the Difference Between Long and Short Term Capital Gain?
How long you own an item is the measure of whether you earn a long term or short term capital gain. The standard rule is that if you own the asset for less than one year, you are subject to the short term capital gain regulations. Subsequently, if you own the asset for more than one year, it is a long term capital gain. There is a large difference between the two, as short term capital gains are taxed at a much larger rate. The general consensus is that if you are in the enterprise of buying and selling assets rapidly, doing so is seen as a form of business income. In home ownership terms, a person who flips houses would earn short term capital gains.
Formulas for Cost Basis and Capital Gain
Your cost basis on an item is discovered by considering all of the fees associated with that asset. In real estate, cost basis is the addition of your purchase price, total real estate broker fees, escrow costs, and selling costs. That total is then adjusted to include any improvements you made on the home. If you need help figuring your cost basis, find a tax preparer who understands all of the intricacies and laws. Once you have found your total cost basis, you can reason your capital gain on the sale of your property. This does not always mean that you will have a gain, you may reach a loss. Your total sale price of the home, less your cost basis, will show the gain or loss in capital.
What is the Home Sale Gain Exclusion?
To help home owners avoid large taxation amounts, the government offers a Home Sale Gain Exclusion. To qualify for this exemption, you must have sold your primary residence, or a home that you have lived in for at least two years of the previous five. Meeting this requirement is easy for most home owners. If you fall into this category, there is a large amount of money to be saved using the exemption. Those who file their taxes as an individual can exclude as much as $250,000 of the capital gains made from the home sale. Married couples who file jointly can exclude as much as $500,000 of capital gain.
Are There any Exceptions to the Qualifier?
You may still receive the exemption if you did not reside in the home for the two of five years, if you meet other criteria. This can include persons who were forced to relocate for their jobs, those who had to sell their home to afford medical costs, and people who have dealt with unforeseen circumstances such as a death or divorce.
How Do You Report Your Capital Gains from a Home Sale?
To report your capital gains from a home sale correctly, it is best to find a tax professional who knows the rules of Home Sale Gain Exclusions. These experts will help you to submit your cost basis and capital gain information on Form Schedule D. There is an option on the form for specifying whether the capital gain was long term or short term.
Selling your home is hard work, which is I, Laurence Smith, and the other tax preparers at Book 2 Tax want to help Nevada residents save as much money as possible on their federal income tax returns.
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