Allen Brothers Houston Real Estate


There has long been a capital gains tax exemption of up to $250,000 on the sale of a person’s own home, condo or other real property, or $500,000 for that of a married couple, but the rules have changed in recent years. Those who know the rules are even more likely to watch the appreciation of their homes and make certain they don’t pay a penny of capital gains tax that they don’t absolutely have to pay - a big bonus in the lavish Houston market.

Currently, individuals making anywhere from $37,000 to $411,000 will be taxed 15% by the IRS for long-term capital gains. That means in Houston's highly valued market, married couples in that income bracket filing jointly can save up to $75,000 on capital gains tax on their home sale; no small chunk of change to just let slip between your fingers when collecting the equity on your primary estate.

Prior to 1997 and the Taxpayer Relief Act, only persons over the age of 55 could take advantage of capital gains tax exemption from the sale of their homes, but now age is irrelevant and anyone can participate. That’s right: anyone. People in their twenties without children can now claim exemptions.

There is no longer a rule that states the money must be rolled over into another home purchase within two years of selling the previous one. This was called the “rollover rule,” but it too was laid to rest in ‘97. Now you may do whatever you wish with your money and still may claim the exemption.

The only factor involving time indicates a minimum of five years of ownership, not occupancy. The owner must have occupied the unit for at least two years out of that five. There are many misconceptions about this rule, with some assuming that the owner must live in the unit at the time of sale – but there can even be a tenant in the house at the time of listing and no rules will have been broken. There are, however, some other things to keep in mind:

You can only claim exemption on one residence at a time. The house must be identified as your primary residence, even if you aren’t living in it at the time of sale, as mentioned above. This means you can’t purchase a new house, lease out your old residence for a few years, and then sell both of them at the same time, claiming the exemption on both. You can, however, claim the exemption on your old house while living in your new one, then proceeding to live another 2 years in the new house in order to begin meeting all the minimum necessary criteria for another exemption. Fun, isn’t it?

When it comes to preparing your house for sale, any cash that you put into it such as new paint, drapes, cleaning, etc., cannot be deducted from the sales price. Significant investments in the capital improvement of your home, however - anything that adds permanent value - can be deducted. Examples of this might be the addition of a garage or a second story. This can be a slap in the face to people who have put several thousand into prepping their residences for the market, expecting to have it returned to them in the form of a tax deduction.

With the passage of Obama’s Affordable Care Act, a new tax has been placed on the sale of all real estate: a 3.8% Medicare tax will be placed on the investment/unearned income of all high income taxpayers. High income taxpayers are individuals reporting more than $200,000 annual income or married couples filing jointly reporting more than $250,000. The interesting part here is that the $250,000 capital gains exclusion applies with regard to the Medicare tax no matter what your income level is. If your income is below the threshold, the Medicare tax won’t enter into the equation. If your income is above the threshold but your capital gain is below the exclusion, the Medicare tax is also out. If your income is above the threshold and your capital gain from the sale of your home is above the exclusion, the Medicare tax will be imposed but only on the portion of the gain that exceeds the exclusion amount.

With a housing market like that of inner Houston, with high property value and a perpetually low inventory of listings, there is almost never a time when properties in this part of the city aren’t incrementally increasing in one manner or another. In the inner loop area of Houston, or around Tanglewood, Hunter’s Creek, Piney Point or Bunker Hill Village, owners can easily wake up one morning and discover that their properties have appreciated well beyond the $250,000 threshold. As one can see, there are a number of ways to take control of the situation long before this ever happens if one wishes. Call an Allen Brothers Realtors agent today to talk about your options.

Posted by AllenBrothers Realtors on February 27th, 2015 1:52 PM

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