What are short-term vs. long-term capital gains and losses?
Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it
more than one year, your capital gains or loss is long-term. If you hold it one year or less, your capital
gains or loss is short-term.
What is the basis and how is it determined?
You need to know your basis in your home to calculate
any gain or loss when you sell it. Your basis is determined by how you acquired your home. If you purchased
or built it, your basis is your initial cost. If you acquired it in some other way (inheritance, gift,
etc), you must know its adjusted basis to the donor just before it was given to you. You also must know
its fair market value (FMV) at the time title was transferred. For more information, log onto www.irs.gov
and search for publication 551 (Basis of Assets).
What are the current capital gains rates?
Generally, for most taxpayers, net capital gain is taxed at
rates no higher than 15%. Some or all net capital gain may be taxed at 0% if you are in the 10% to 15%
ordinary income tax brackets. However, beginning in 2013, a new 20% rate on net capital gain applies
to the extent that a taxpayer’s taxable income exceeds the thresholds set for the new 39.6% ordinary tax
rate ($400,000 for single; $450,000 for married filing jointly or qualifying widow(er); $425,000 for head
of household, and $225,000 for married filing separately). Publication 505
If I make a profit from selling my home, do I get to keep any of it tax-free?
As a single homeowner,
you can exclude up to $250,000 of capital gains. If you are married filing separately, each of you can
exclude up to $250,000. If you are married filing jointly, together you can exclude up to $500,000 of
capital gains.
Is this a one-time exclusion?
The exclusion is allowed each time you sell or exchange your principal
residence, as often as every two years. And you are not required to reinvest your proceeds in a new residence
to claim the exclusion.
What is the ownership and usage criteria for claiming the exclusion?
To be eligible, you must have
owned and lived in your home as your primary residence for a combined period of at least two of the last
five years prior to selling or exchanging your principal residence.
What is a real estate depreciation recapture?
Depreciation is the decrease in the value of property
over the time the property is used. Depreciation recapture is when a property used for business purposes
is sold at a gain; if accelerated depreciation has been claimed, you may be required to pay tax at ordinary
income rates to the extent of the excess accelerated depreciation.
We own rental property. If we live in it as our main home for two years, can we sell it and not pay
capital gains tax?
You may be able to exclude your allowed amount of capital gains from the sale of
your main home that you have also used for business or rental property if you meet the ownership and
use criteria outlined in the above paragraph. However, if you took depreciation on your home used for
business or rental property, you cannot exclude the part of your gain equal to the depreciation taken or
allowable for the periods after May 1997. If you can prove that the depreciation taken was less than the
amount allowable, the amount you cannot exclude is the lesser of the two figures. Refer to publication
523 on www.irs.gov for more information.
Additional information on capital gains and losses may be found on www.irs.gov or you may contact your local tax specialist. This information is provided as a courtesy by Colorado Professionals Title. It is deemed reliable, but not guaranteed.
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