What is capital appreciation from the sale of real estate? This is the first question you should ask when selling real estate in the United States for more than you once purchased it.
The proceeds are very good, but you should understand that there is also tax on that amount. Yes, even if you already pay income tax and sales tax, the gain from the sale of the house is also taxed.
In a nutshell, capital gains tax is a fee levied on property that has been in your possession for more than a year and is now sold with the proceeds at a price.
“But unlike other investments, the capital gains tax benefits from a variety of exemptions that can completely exempt the seller from this tax under certain conditions,” says RE/MAX agent Kyle White.
The IRS gives every citizen, regardless of the amount of income, the freedom from tax on a primary, i.e., principal, home with an initial value of $250,000 or less.
“So if you and your spouse buy a house for $100,000 and then sell it a few years later for $600,000, the sale proceeds are not subject to capital gains tax,” explains New York attorney Anthony Park.
Either way, you need to prove that your sale falls under this case, which means proving that:
- this is your primary residence;
- You’ve been an owner of the place for at least two years;
- You have lived in the place for at least 2 years in the last 5 years.
If not all of these options work for you, you may qualify for a partial capital gains tax exemption.
Because of the changes you’ve made to your home, you can reduce your tax percentage. The money you spent on any home improvements, whether it’s re-shingling the roof, adding a porch, putting in flooring, fixing up the basement, can be added to the original value of your home to adjust it in the end.
For example, if you bought your home in 1990 for $200,000 and now sell it for $550,000, but you put $100,000 into it over those 29 years, that money will be deducted from the actual value of the property being sold. Thus, the tax is not $350,000, but already $250,000. And this amount falls into the tax-free capital gains category.
The IRS also gives you the option of a “free admission basis” when you inherit real property. What does this mean?
For example, your parents bought their house years earlier for $100,000. After their death, you inherit it, and its value is already $1 million. Its price “base” in such a case would be exactly $1 million. There is no taxable gain, as such.