Now that prices have recovered, people are asking me about capital gains taxes again. There are a lot of myths out there on this topic.
The most common myth is that you have to buy another home of equal or greater value in order to avoid paying capital gains taxes. The second is that you must be at least 55 in order to avoid capital gains tax. The third myth is that your capital gains tax will be figured on your equity (sales price minus mortgage balance). None of these are true. Some of them WERE true prior to May 7, 1997, before the tax law changed.
Under current tax law, most of the time you can sell your primary residence and avoid capital gains taxes on up to $250,000 of gain if you are single, and $500,000 if you are married. If you have lived in your home for at least two out of the past five years, this will qualify as your primary residence. It doesn’t matter if you are buying another home or not, it doesn’t matter how old you are, and it doesn’t matter if you are currently living in the home.
“Gain” is defined as your profit on the transaction, not your equity. Gain is sales price minus selling expenses minus purchase price minus buying expenses minus improvements. Your buying and selling expenses are your closings costs, inspections, commissions, etc. Improvements are anything that you’ve done to upgrade the home. This does not include what you’ve done to maintain it, only capital improvements. So putting in a pool is an improvement, painting the exterior is usually not (unless you painted it in order to sell it, then it could be argued that it was a “selling expense”).
THIS IS GENERAL INFO. SEE A TAX EXPERT FOR SPECIFICS TO YOUR SITUATION.