Capital gains tax, or CGT, is a tax imposed on the profit (capital gains) resulting from the sale of an investment. For example, capital gains are commonly realized after the sale of stocks and property. To calculate capital gain, subtract the purchase price from the sales price.
Generally, when you sell your primary residence, you can make up to $250,000 in profit if you’re a single owner, twice that if you’re married, and not owe any capital gains taxes.
There are a few rules to follow, of course. First, the property you’re selling must be your principal residence. That means you live in it. This tax break doesn’t apply to a house or other property that you have solely for investment purposes. In those cases, the usual capital gains rules apply.
You also must live in that principal residence for two of the five years before you sell it. This is known as the use test. It also means, practically speaking, each sale must be at least two years apart.
That still leaves you room to make some money on several properties. You can sell your residence this year, pocket any gain within the tax limits and buy a new residence. Then two years later, you can do the same thing, again and again, every two years. And you no longer have to worry about that pesky prior-law reporting requirement. When your gain doesn’t exceed the limit, you don’t have to file anything with the IRS. As always, please consult with your CPA regarding issues of taxation.
In some cases, there are ways to lower your capital gains taxes, or hold title to your property in a manner that is more advantageous with respect to capital gains taxes, however, real estate agents cannot provide legal advice regarding these issues. As noted above, as a licensed attorney, Mr. McKenzie has much more experience with issues relating to taxation and title than a Realtor® or real estate agent, and can provide valuable estate planning advice that you would not receive elsewhere. If appropriate and relevant, this advice would be provided to you at no additional cost.