When Does Capital Gains Come into Effect on Your Primary Residence?
This would be a really good question to ask our agents, you know how we did that poll before, because every time at closing, this is the consistent thing that you hear all the time when the seller has to, you know, they ask the sellers or buyers, I mean, sellers questions about the property that they’re selling.
So so we’re going to quickly discuss what this is all about, because if you made money on your property right and it appreciated went up in value, then you could potentially have a capital gains issue. So there’s a couple of key questions.
We have a link and we’re going to go ahead and open up this article. And just so I have the exact words in here. And here we go. So I’m going to take control of this and pull it over, and it has to do with how long you’ve owned the property.
Ok, so primary residence? Yes. So if this is your primary residence, right and you must have been the owner of the home for at least two years, so you have to own the property for two years. And in addition to that, you have to answer another question over the last five years.
Has this been your primary residence for at least two of the years? Well, if you lived, if you’ve owned the home for two years, they’re kind of asking the question of did you move from another house and then not have this as your primary residence?
So you had to live there and have this as your primary residence for at least two years? And you can’t have claim this exemption within the previous two years on another property. Ok, so a bunch of criteria, but two years living there is pretty much the thing in your primary residence. And if you have, then this is not an issue at all unless your number exceeds two hundred and fifty thousand dollars per person. If your file single singly or if you file jointly right with another person, then it’s five hundred thousand.
So if you’ve lived there two years and then this amount, your gain does not exceed that amount, then it’s a non-issue. And that’s how it’s been standard around here for a long time because it hasn’t exceeded that right, right? And people were staying in their homes a little longer, but now people are churning and moving their homes. It used to be the average five to seven. Now it’s like, I don’t know, some people are moving within a year, so it’s crazy.
So what happens is we have to figure out what is your cost basis on your home. So what your cost basis is is how much you paid like the original price now, how much you’ve financed, but like the total purchase price, plus the cost of any additional improvements that you made or enhancements to the property added to the base price. So now, you know, I always like to kind of break it down to simple numbers. So if you paid one hundred thousand for your home, which might not be the case, but you’d multiply it out times, however many hundreds of thousands and then whatever improvements.
So if you put in twenty thousand dollars worth of improvements now, your cost basis would be one hundred and twenty thousand irrelevant of how much you owe on the home right now, how much your initial mortgage was. None of those things would matter on your cost basis, then how much you sell it for.
So in this scenario, if you sold your home for two hundred thousand dollars, you would have a gain right of eighty thousand dollars minus any expenses transactional expenses that you had along the way to also get there. So it’d be the cost for all of the stuff at closing to sell it that you’d add in there as well. Plus what it was to buy it when you had there. S
o now you have additional numbers to bridge this gap, maybe bring it down to sixty thousand. So in this scenario, that number does not exceed two hundred and fifty thousand for one person or five hundred thousand for two people.
But then the second rule is, have you lived there for two years or more and had that is your primary residence for that time frame? Ok, yes. So in answering that question, that’s the next thing for you to know your timeframe on how long you’ve been there.
Now this is extraordinary income, not ordinary income, which is taxed differently than your ordinary income. Ordinary income is taxed based on how much you make, right? And there’s it’s basically more or less probably taxed at a higher rate. Mm hmm. Extra ordinary income is something that you do every once in a while to make money, and you could have a stock appreciation or something along those lines and then you’d have to pay tax on it. Now, the tax limit is limited to 20 percent, no matter what it is.
But in most scenarios, it’s going to be 15 percent on long term capital gains. Anything that exceeds, I believe, holding it for one year time frame. Mm hmm. Ok, so if you’ve held your home now for less than one year, then you’re going to be subject to.
Short term capital gains, long term capital gains could be anything over one year, which I believe here and you can revert back to the article is going to be 15 percent in the short term. Is the 20 percent right on this because it’s extraordinary and and it’s your home and whatever that is, then if you’ve lived in there for more than two years, then that number would go back to probably zero as long as you don’t exceed 250 or five hundred total correct?
So that’s a lot of information that was great information, but what you guys need to know is if, if, if you’re dealing with a seller that has, you know, you notice, wow, they just bought this house in July, then this is something you need to be aware of and and really ask them about because, you know, I’m I would think that most people would have thought of that, but you know, you just want to make sure you have that discussion.
There’s also some, some some ways to avoid paying the taxes, but you know you’re most likely going to have to pay them regardless. They always ask you in the last five years, have you? So there’s a I think there’s two things one, there’s a rule, a six year rule that you can move out of your home.
And rent it out, so you move out and you rent and you rent out the former home and then before the six year. Time then, you can avoid capital gains that way if you’re renting that entire time. Now these are things that you know, but that’s only if it exceeded five hundred, if it exceeded only if it exceeded two or two. You know, another thing that I was wondering and that I looked up is, OK, if you’re over a certain age, right, do you still have to pay capital gains?
Yes, there’s no age restriction or limitation or anything. It’s, you know, if you’re eighty five years old. And you have capital gains, then yes, you pay tax.
So Martha asked a question of when is the time frame officially start? It would be when you acquired the property. Right? So when you officially close. So in certain scenarios, if you are taking out a combined loan for the land and for the structure upon it, then that would be a different time frame. Most people happen to purchase maybe a home that’s previously lived in.
So, you know, it’s already built and they would take possession that day. But if there’s something different with like a lease leaseback or anything like that, it goes to the closing date and not when you actually write, not when you moved in and in this scenario.
I believe the answer, Martha, would be that if you were building the home, but you had had the loan the whole time and you had had all the stuff in your name, and it was a true where the loan was all in your name and you actually owned all of it, not the builder owned it or the builder own the land. It would be where it was titled would be the answer to that question to dig back a little bit deeper. Interesting.
So the question on that? A good example. To give everyone a scenario, there would be the property that we have up at the McKinney link because we’ve owned it now for about a year and we have not made substantial improvements to it. But when we eventually build a home, if we were to sell it, the time frame would go back to when we initially purchased the property, not when we started to build on it because we’ve own the property the whole time. Mm hmm.
Ok. And if we titled it now in something different, then we could potentially have a restart time frame on when that would be. So there’d be some super, super detailed questions in there. But if that applies, contact me directly. But that’s getting super into your accountant. Yes, we’ll work through it.
Logan, great question. Great job, Logan. That’s really a good thing to bring up, especially now in the market that we’re in. So way to go. All right. It was attacked.