So You Think You Know Capital Gains? 10 Facts You May Not Know

Capital Gains may not be as clear-cut as you think.  If you're planning on selling your home, or are just interested in gaining knowledge on the subject, check out these 10 facts about Capital Gains.

1.  The exclusion only applies to your primary residence

Your primary residence is the one you live in most of the time. If you own and live in more than one property, you can nominate any one of them as your primary residence.  However, you can’t be disingenuous to get the tax concession.  The IRS applies certain tests to make sure the home you nominate is your primary residence. Where you work, where other family members spend a major part of their time and where you vote all play a part in determining your primary residence.

2.  To claim the exemption, you must live in the home for at least 2 years before selling

The 24 months do not have to run concurrently. So, you could live in the property for 18 months, move out for a year, then move back in for a further six months and still claim the home sale exclusion.  The 24 months must occur within the 5 years prior to selling

3.  You must own the home for at least 2 years

Same rules as above apply

4.  "Unforeseen Circumstances" may be taken into account

Unforeseen circumstances are unpredictable events that happen at short notice and affect your ability to remain in your home. So, serious ill-health, divorce, a family death or your job moving more than 50 miles away count as unforeseen circumstances. If you experience any of these events, you can still claim the home sale exclusion even if you sell your home before the two year qualifying period is up

5.  "Unforeseen Circumstances" may reduce your deduction to less than $250,000

Most home owners can deduct all of their gain up to $250,000. However, home owners who claim an unforeseen circumstances exclusion can make only a partial deduction based on their occupancy. So, a home owner who lives in her house for the full two years before a home sale can deduct the first $250,000 of profit from her taxable income. A home owner who gets divorced and moves out after just six months can claim one-fourth of that amount or $62,500

6.  Married filing jointly allows you to deduct up to $500,000

Both spouses must live in the property for at least two out of the five years immediately preceding the sale. They do not, however, have to co-own the property — only one spouse needs to meet the two-out-of-the-last-five-years ownership test

7.  You can use the tax-break an unlimited amount of times

The main residence tax exclusion is not a one-time deal. Qualifying home owners can buy a home, live in it for two years, sell the home and exclude the capital gain– then repeat the process. You can keep repeating the process as many times as you please

8.  Expenses can lower your gain

Many of the expenses you incur in selling your home and improving it over the course of your ownership can be deducted from the sale price to reduce your net taxable gain. For example, you can deduct appraisal fees, advertising fees, escrowfees, notary fees, broker’s commission, title search fees and other closing costs. You can also deduct the cost of capital improvements such as adding a new kitchen, upgrading the heating system or fitting a wall-to-wall carpet. Regular home repairs that simply keep your property in operating condition, such as fixing broken guttering, can’t be deducted

9.  Many do not have to report the gain

Home sellers who can exclude their gain don’t need to report the home sale to the IRS. However, you must report the gain if you can exclude only part of it or if the IRS sends you an informational income reporting document such as form 1099-S

10.  You cannot deduct a loss

Tax law does not allow taxpayers to deduct a home sale loss from their taxable income. The exclusion applies only to capital gains

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