The tax professionals at Johnson, Johnson & Associates, Inc in Yeadon, PA have previously shown you that if you sell your home, you can exclude up to $250,000 on your capital gains from tax if you’re single (or married but filing singly). If you’re married and filing jointly, this amount doubles, meaning that you’ll be able to exclude up to $500,000 from the capital gains.
There are a good number of set conditions that you must meet to claim the $250,000 or $500,000 exclusion. For example, you must have owned and lived in the home as your primary residence for a combined two years over the five-year period leading to the sale. This is called the ownership and use test. Also, you can only claim the exclusion once over a two year period. There are other conditions that have to be met which you can learn from Johnson, Johnson & Associates, Inc in Yeadon, PA.
The first step when dealing with capital gain taxes is to figure out your gain. Most people only believe that the gain is the profit they make on the sale. That if you bought the house for $400,000 and are now selling it for $700,000 then you're making a gain worth $300,000. That is not how gains are calculated.
Tax professional at Johnson, Johnson & Associates, Inc in Yeadon, PA has come up with a simple way of calculating capital gains. The capital gain is calculated as the selling price, minus deductible closing costs, selling costs, and your tax basis on the property. To determine the tax basis, you take the sale price, add all purchase expense, add all costs of capital improvements, then subtract any depreciation, and finally subtract any casualty losses or insurance payments.
Deductible closing costs include expenses such as points, prepaid interest on the mortgage, and your share of the prorated property taxes. Some of the selling costs that are deductible include title insurance costs, legal fees, administrative costs, real estate broker commissions, escrow fees, and inspection fees. These are expenses that you directly incur in the process of selling the home.
It is possible that you haven't been able to live in the house for a cumulative two years within the five-year period leading to the sale. Even under these circumstances, you're still eligible for partial exclusion of capital gains if you sold due to certain unforeseen circumstances. For example, you might have sold the home because your doctor recommended that you live in a different environment. Or, you might have sold it because you just divorced. It is also possible to sell your house if you've been transferred by your employer or if you're taking up a new job in a different place. All these reasons can be bases upon which you claim capital gains exclusion.
You could always speak with Johnson, Johnson & Associates, Inc in Yeadon, PA to learn other avenues that would allow you to claim the exclusion even if you don’t meet the requirements of the use test. Let’s assume that you have calculated your capital gains to be $100,000. As an unmarried taxpayer, you’re aware that you can claim a capital gains tax exclusion of up to $250,000. But you’ve only lived in the home for 12 months over the five years leading to the sale. Unknown to many, you can still claim a half of the $250,000 because you used the house for half of the required time. So, effectively, you’ll be able to claim $125,000 exclusion which covers the $100,000 gain.
For owners who have been living in a nursing home for any reasons, the use test is lowered to one year over the five years leading to the sale. But even more importantly, the period when you live in the nursing home is counted towards use and ownership. So, if you lived in the home for one year then moved to a nursing home where you’ve been staying for the past five years, the $250,000 exclusion applies.
For married couples filing jointly, you may face a few complex considerations that only professional tax experts such as Johnson, Johnson & Associates, Inc in Yeadon, PA can help you with. For example, newly married couples filing jointly may be able to claim a double tax break even if only one couple has been living in the home for the required two out of five years. However, its’ not as simple as it sounds because there are a lot of documents you’ll need to provide. Then there are also issues to deal with if you’re trying to sell the home immediately after a divorce.
If you’re selling your home and intend to claim capital gains tax breaks, then the best advice is to contact the reliable Johnson, Johnson & Associates, Inc in Yeadon PA for assistance.
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