CASE STUDY: How TWO WEEKS can cost homeowners thousands in taxes (Make sure you know this IRS rule BEFORE selling your home)
Early in February, a married couple came to us and told us exciting news: they just sold a mid-century modern home in West Hollywood, netting over $300,000 in profit! They wanted to know what the tax implications were. After our team reviewed their case, we had to tell them some sobering news: if they had waited just two more weeks before selling, they could have excluded all of their home sale related gains from their tax returns. Needless to say, they were shocked upon hearing this.
Before you sell your home, make sure you know about the Home Gain Exclusion Rule
When you have a capital gain on the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income (or $500,000 if you’re married filing jointly). You’re eligible for this exclusion if you have owned and used your home as a primary home for at least two out of the five years before its date of sale. Our clients would have qualified for this exception had they stayed for just two more weeks.
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Even if you don’t meet the two year use requirement, you may still qualify for a partial exclusion if you meet certain “approved unforeseen circumstances.” Some of these circumstances include a death in the family, losing your job and qualifying for unemployment, or for approved medical reasons. The partial home sale exclusion is normally limited to the percentage of the two years up to the date of sale that you owned and lived in your primary home.
If you didn’t qualify for any of the home sale exclusion, you’ll owe tax on all capital gains related to the sale of the home. The tax rate for long-term capital gains could range from as low as 0% to as high as 20%, depending on your income.
Happy ending for our clients
What would you do with the money you saved in taxes?
Fortunately for our clients, they sought out tax advice from KENGO. We were able to help them save by employing a partial tax exclusion. The home sale exclusion is the most significant tax break available for individuals selling a home. It should be an essential tax planning consideration whether you are buying or selling a home.
To find out more tax savings strategies for homeowners or for investors including how to properly set up a Section 1031 exchange (and avoid any capital gains for your investment properties), fill out a contract form and one of our team members will reach out to you shortly.
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