I get asked quite a bit about capital gains taxes when selling a property, so today I want to talk about how you can avoid them if you’re selling a property.
Let me preface this discussion by saying that I’m a Realtor—not an accountant. You need to verify all of this information with your accountant and work with them before you make any decisions related to this scenario.
Now, let’s say you own a property that’s worth $800,000 but you bought it for $400,000 back at the downturn of 2008 or 2009. Clearly there’s been a lot of appreciation on this property, and now you’re getting ready to sell it to buy something else. How much of that $400,000 in appreciation will you end up paying in capital gains?
One thing you get to subtract is your closing costs. Let’s say selling it at $800,000 would net you $50,000 worth of closing costs. You also get to subtract capital improvements, which we’ll say are worth $20,000 in this example. Those two subtractions put you at $330,000.
From here, we’ll delve into two different scenarios.
If the house in this example if your primary residence and you’ve lived in the property for the last five years, you’re protected for up to $250,000. Subtracting that amount from the $330,000 puts you at $80,000.
If you’re married and both parties have lived in the house for the last five years, then you’re protected for up to $500,000, which would put you at minus $170,000. In that case, you wouldn’t pay any capital gains when you shift your money from one property to the next.
Why is this so important? A lot of it has to do with timing. If you sell your property after a year and 10 months instead of two years, you’ll pay a lot more in capital gains. When you sell a property, pay attention to the timing and make certain you consider the capital gains cost in that sale. You want to figure out as close as possible how much money you’re going to take from one purchase to the next. If it means waiting a couple extra months, it’s well worth it.
If you have any questions about this or any other real estate topic, please feel free to reach out to me. I’d be happy to speak with you!