The Real Estate Encyclopedia
What Is Capital Gain?
Category - Home Selling Questions - Selling Legal & Closing FAQ's

The profit on selling a home owned is a capital gain, subject to federal and state capital gains tax. The profit, or capital gain, is reduced by the original cost of the property, selling expenses and outlays for improvements over the years of ownership.  If the seller is absorbing a portion or all of the closing costs, it might be advantageous to drop the purchase price by a certain amount.  Again, any adjustments must meet tax laws and lender requirements. 


While Realtors’ commissions, lawyers’ fees, and other closing costs are no longer deductible, these costs can reduce capital gains by adding to the cost basis or reducing the adjusted sale price. See IRS Publication 530, “Tax Information for Homeowners.”


The tax law enacted in 1997 provides tax relief on the sale of your home. You may avoid paying taxes altogether on the first $250,000 (for single taxpayers) or $500,000 (for married taxpayers) of gain realized at sale.  This rule replaces both the “rollover exclusion” that allowed you to avoid tax so long as you purchased a new residence at equal or greater price than the old one, and the “over-55 exclusion” that provided a one-time $125,000 exclusion on gain if you were 55 of older at the time of sale.


To qualify under the new rule, you must have owned the home and occupied it for any 2-year period out of the last 5 years prior to selling. You can only use this provision once every 2 years, but if you move after a shorter stay than 2 years due to a job change or health problem, you can prorate the credit for the time you actually owned/lived in your home.  Gains above $250,000 / $500,000 are taxed at a 20% capital gains rate, down from the former 28% rate.  Contact your tax preparer for more information about this new law. You should continue to maintain records of improvement expenses in the event your gain exceeds the $250,000 / $500,000 profit cutoff.


If you moved to a new home because of a new job or a job transfer, you may qualify for a moving expense deduction. The distance between the old home and the new job must be at least 50 miles more than the distance between the old home and the old job. The location of the new home is not considered. .A seller may deduct the cost of moving household goods and the direct cost of moving you and your family. You may deduct expenses for lodging during the move but not the cost of meals.

Home Selling Questions - Selling Legal & Closing FAQ's
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