Capital Gain Tax Exclusions


Hello my Weber Weekly readers! This week I wanted to address capital gain taxes and guidelines on how to avoiding these. First, let me clarify that capital gain taxes differentiate tremendously between investors verse people who use their property as their primary residence. Today I will be elaborating on the latter- primary residence property.

Homeowners Exclusion Rules under 2013 California Real Estate Tax Law states that:
-Single homeowners can exclude up to $250,000 of capital gain from taxes
-Married couples filing jointly can exclude up to $500,000 of capital gain from taxes
-Unmarried people who jointly own a home and separately meet the test can exclude up to $250,000 of capital gain from taxes

Three tests that qualify for Homeowners Exclusion Rule:
1. Ownership: Seller owned the home for at least two of the five year period before the closing date.
2. Use: Seller used the property as a principal residence for two years of that five year period.
3. Waiting Period: The exclusion wasn’t used during the preceding two year period.

Qualifications for married couples:
1. They must file a joint return for the year.
2. Either spouse meets the ownership test (described above).
3. Both spouses meet the user test
4. Neither spouse has recently excluded a gain fro the sale of another home after May 6, 1997
If either spouse does not satisfy all these requirements, the exclusion is figured separately for each spouse as if they were not married. This means both spouses may qualify separately for part or all of the $250,000 exclusion under 2013 California real estate tax law.

If you do not fall within these guidelines you may still qualify for a partial or prorated tax break.
-Moving  due to unemployment
-Doctor recommendation to move
-Unforeseen circumstances ie: death in family, divorce, nursing home move.
The portion of this tax break would be calculated on the portion of the two-year period which you lived there. For calculations you would take the number of months you lived there before the sale and divide it by 24.

Calculation example and what to include in deductions:
Many people do not know to include items such as closing costs and capital improvements as part of their deductions in capital gains. For example people would assume if they bought a house for $100,000and sold it for $400,000 it would be a gain of $300,000 which is $50,000 over the exclusion. This is incorrect.
Things you can deduct include:
-Closing costs
-Broker’s commissions
-Title insurance,
-Advertising costs,
-Administrative costs
-Escrow fees
-Inspection fees
-Legal fees (if any)
-Tax basis in the property
(Your basis is the original purchase price, plus purchase expenses, plus the cost of capital improvements, minus any depreciation and minus any casualty losses or insurance payments).

After implementing some of the deductions and using the same example above it would look more like: They bought a home for $100,000 sold for $400,000 but invested $20,000 in home improvements, $5,000 in fixing up the place and $25,000 in closing costs leaving them with NO capital gains tax at all.

***Because every home, sale, escrow, and individual cases are different I would advise that you consult with your CPA or tax attorney before making any claims and to make sure you are deducting as much as you are allotted for***

I hope this week’s blog has given you a better insight on how capital gain tax exclusions work. As always, please fee free to reach out to me if you have any questions or would like to be pointed in the right direction of a great tax advisor.

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