Home ownership has historically held many tax benefits and one of the biggest perks has been the ability to exclude profits realized from the sale of a home from the 15% capital gains tax. To qualify for this exemption the homeowner must have owned the property for at least two years and have lived in the property for two of the last five years. Once these tests are met then up to $250,000 of profit for a single person and $500,000 for a married couple could be exempt from taxation. Unfortunately many homeowners today are underwater on their homes and the sale of a home may not result in any profit. However, a sizable portion of people can still benefit from this tax exclusion afforded homeowners.
With the drop in real estate prices more and more homeowners have decided to become landlords and rent out their properties. Often this occurs when seeking a larger home or having to relocate for a new job and the existing house can’t be sold or the owner doesn’t want to sell for current market prices. These so-called “accidental landlords” should keep the government’s capital gains exclusion guidelines in mind when going this route. Any owners with equity who are vacating the property to rent it out should consider the option of selling, even if at a reduced profit, to avoid paying capital gains. At least knowing the current tax laws can help each person make the decision that best fits their needs.
One other point to keep in mind regarding this capital gains exclusion afforded by the government is that if a property was rented your excluded capital gains amount will be reduced by the depreciation taken, or that could have been taken, on the property while rented. As always it’s best to consult with your accountant or other tax professional to determine the best course of action.
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