Selling a home can mean the chance to move to a new location. It can also mean a reduction in how much money is going out every month. Both can be very valuable, but it is important for every seller to know that there can also be costs and fees associated with selling a home. Being aware of these from the very beginning of the process makes it easier to sell a home and can reduce anxiety and help the seller prepare for any expenses that come along with the process. One of those expenses may be capital gains tax, although many sellers will be exempt from all or part of that tax. Here is what sellers should know.
Marital Status Matters for Capital Gains
People who are single can exclude the first $250,000 of the selling price of their home from capital gains tax. Those who are married can exclude the first $500,000. That means that any house selling for less than that amount will not have a requirement to pay any capital gains tax. Homes that sell for more than that mean the seller will only pay tax on the portion of the sale above that amount. That can help any seller save significant funds. In some cases, unmarried people who live together can also meet the “married” test for purposes of this tax, and each one will be eligible to deduct $250,000 of the Old Town Triangle home's price when they pay their taxes.
Homes Must Pass the “Use Test”
While this reduction in capital gains tax is very helpful for sellers, it does not protect everyone from the need to pay capital gains tax. If a seller has not lived in the home, and it has not been that person's primary residence for at least two out of the last five years, there is no exclusion. In short, the entire selling price of the home, minus what the seller paid for the home, verifiable improvements, closing costs, and a few other deductions, is subject to capital gains tax. For sellers who purchased cheaply, sold high, and did not put much money into the house while they lived there, the amount of gain can be significant. That means the taxes that must be paid on the house can also be significant, making it difficult for sellers in some cases.
Are There Any Special Circumstances?
Fortunately, there are some special considerations that can allow capital gains tax exclusions for sellers who have not lived in their home for two years. These are called unforeseen circumstances, and they can include divorce, death, and an employment requirement that a person relocate. A seller who changes their mind about living in a particular house or neighborhood will not be allowed to use any exclusion from this tax. But a seller whose job has required them to move across the country for a new position may be able to. The circumstances must be provable and verifiable, and the seller may not be able to get the entire exclusion, but this can definitely help reduce the tax burden of a seller when unforeseen issues arise and they have to move.
No matter when a seller decides to move on from a house, working with a good agent to get a fair price is a smart idea. Sellers may also want to work with an attorney or tax professional to determine what kind of taxes they may need to pay if they move out of their home before they have lived in it as a primary residence for two or more of the last five years. That knowledge can help them decide if now is the right time to sell their home.
Ted Guarnero, REALTOR® is a full-time real estate agent with over 1000 homes sold and $400 million in sales. Working with Compass real estate offering professional and effective real estate services to help you succeed in the local real estate market. Visit www.seeChicagorealestate.com for information on downtown Chicago real estate and to get in touch with an expert in the Chicago real estate market. Before you hire your next Realtor call Ted Guarnero 855-See-Chicago, it's on the House !