If your real estate clients are selling their homes, it’s important that they understand capital gains taxes. The subject is complex, but here’s a brief primer you can use to give your clients a basic explanation of capital gains taxes.
What is capital gain?
Homeowners who sell for a profit have received a capital gain. A capital gain is the difference between the seller’s cost basis in the home and the amount for which they sell the house. The homeowner’s cost basis is the amount they paid for the home plus any capital expenditures that improved the house, such as installing hardwood floors or remodeling the kitchen. Advise your clients that they should be careful to keep all receipts for capital expenditures so that they can later document increases in their home’s basis.
How are capital gains taxed?
Capital gains are taxable at a special rate. But depending on certain criteria, the IRS may determine you do not owe any taxes on at least part of your capital gain. A single homeowner may pay no gain on up to $250,000 in capital gain. A married couple may be exempt from capital gains taxes on up to $500,000 in gain. However, to claim these exemptions, the taxpayer(s) must have lived in the home for at least two of the previous five years. If the seller lived in the home for less than a year, she will pay regular income tax on the gain from the sale. If the seller lived in the house for more than one year but less than two, she will pay taxes at the special capital gains rate on all of her gain.
Other qualifying conditions affect capital gains taxes, so advise your clients to talk to a trusted tax professional about their situation.