Hey, how’s it going? We’re gonna talk for just a minute about capital gains taxes. Seriously, just a minute.
Before I start, something needs to be said. I am not a tax professional. I’m a REALTOR. Everything from this point on is for general knowledge only, and not to be considered tax advice. For that reason, any seasoned real estate investors may want to skip to another video. Or maybe not. I’m funny sometimes, so that could be reason enough to stick around.
Now that all the experts have left the room, let’s talk about capital gains taxes. If you’re hoping to invest in real estate, either as a one-off purchase or as a continuing source of income, then this is something you’ll need to know a little something about.
So, your first question might be, “What is a capital gains tax?”
That’s a good starting point. Basically, the capital gains tax is a tax Americans pay on any profits they earn, whether from real estate investment or any other type of investment. Here, we’re specifically talking about those real estate investments, right?
When you sell your home for a profit, there is a possibility that your profit will be reduced in the long run by the capital gains tax.
It’s possible…but not always the case. So, let’s dig a little further.
If you’re selling your primary residence, you’d have to be looking at a pretty substantial profit before worrying about paying capital gains tax. The Taxpayer Relief Act of 1997 says that an individual who makes a profit of more than $250,000 on the sale of their primary residence will be responsible for capital gains tax. A married couple filing jointly is exempt up to $500,000.
Now, remember… We’re talking about a primary residence. There is one big thing you’ll need to keep in mind if you hope to sell your home at a profit while remaining exempt from capital gains taxes. You have to live in the home for at least two of the previous five years. In other words, if you buy a home and sell it less than two years later at a significant enough profit to no longer be exempt, then you would owe capital gains tax.
Okay, you still with me? Maybe you’re interested in learning more about real estate profits that aren’t of the “primary residence” variety. Maybe you want to talk about how to sell your rental properties…
Unless you live there for two years, you’ll pay the tax. Now, you can rent it for a year, live there for two years, then rent it for two more years, and then you’ll be exempt. Or, you know, rent it for three years and live in it for two years. Or you could rent it for… never mind. You get the picture.
There are a couple of other ways to exclude smaller amounts of your profit, such as moving from the home for job changes, medical problems, or other unforeseen issues. You have to meet some pretty specific criteria to explain why you didn’t live in the home for two of the five years, but it’s possible.
Let’s look at one more scenario, just so you know what you’re working with here. Let’s say you’re married, and as a couple, you own two houses. You live in one house for two years, and the other for three years, and then want to sell them both at the same time. Can you claim the exemption?
Nope. You’d be better off selling the first home after living there for two years, and then selling the second after living there for three, because you can only claim the exemption once every two years.
So, let’s say you’ve lived in Nashville or the surrounding area, and you’ve seen the property values skyrocket lately. That’s not too hard to imagine, is it?
What could you do to help ease the tax burden? In some cases, you could invest your profits into a comparable investment.
This is where I remind you that I’m not a tax lawyer.
However, if that’s something you’d like to explore, we can go there together. I’m happy to help.