Capital Gains

Hi
Can someone explain capital gains and how it applies to real estate??

TIA

The really abridged version....

You can live in any type of residence that you own (co-op, condo, house). As long as you live there for two years and its registered as your PRIMARY residence... you can sell it after two years... make any profit you want (up to 250k in profit) and not pay any tax on the profit.

Examples:

I bought my 1br co-op in January '01 for 69k. I sold it in August '03 (about 30 months after buying) for 109k. My capital gains on the sale was 40k. I was able to pocket it all and not pay any tax since I owned the residence and lived there as my primary for over two years and my gains of 40k did not exceed the allowed 250k.

Lets say that I decided to sell the co-op in August '02 for the same price of 109k. I would have had to pay taxes (whatever my tax bracket is) on the 40k gain since I didn't live there for a full two years.


Another example:

Lets say your mom bought her house in 1950 for $50k. She lived there all her life. She is now ready to retire and buy a smaller house down south. She sells the house for 500k. She made 450k in capital gains. She doesn't have to pay gains tax on the initial 250k since she lived there for more than two years... but she does have to pay taxes on any gains over 250k (in her example... taxes on 200k of the gains).


If you have vacation homes, rentals, investment homes, you have to pay taxes on these regardless of gains or how long you owned cause you are not living there as your primary residence.

Of course there are contingencies... but I think this sums it up the easiest. If I am wrong... somebody correct me.

This is also how I understand Capital Gains.

Great explanation DJPill.

Upon investigating this further... there are more 'exceptions' that help the seller.

The total profit allowed for MARRIED couples is 500k in gains. The 250k mark is for a single person / single owner. So in my example above... if Mommy that sold her house for 500k was married... than she is exempt from ALL taxes on the 450k in gains.


Also... even if you live in the house for less than two years... there are ways around the taxes depending on how long you lived there compared to the amount of gains you received... as well as other exemptions like medical reasond and such.


Here is a good article that explains it all.

Linky

This portion just shows there is an evil accountant just about anywhere thats willing to 'bend the law'. But good knowledge to have nonetheless.

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Splitting Up Big Gains

If you expect huge gains from selling a house -- more than can be excluded from tax under the new rule -- you should consider ways to divide ownership of the house.

For example, say a couple owns their residence together with their adult son (perhaps because they have given him a share). If he meets the ownership and use tests as to one-third of the property, the son may sell his share for a $250,000 gain without incurring a tax. His parents could simultaneously sell their share for $500,000 without tax, sheltering the entire $750,000 gain.

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Wait, so what you're saying is, as long as you lived there for 2 years and it was your primary residence & you didn't profit more than $250K, you don't have to worry about paying capital gains?
I thought you had a year to reinvest that profit $$$ from the sale, or you'll get hit with capital gains as well??? I'd be thrilled if this wasn't the case!

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Posted by mv1003

I thought you had a year to reinvest that profit $$$ from the sale, or you'll get hit with capital gains as well???

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I thought that was the case as well. I don't know much about capital gains though. I also thought it was just 1 year you had to live in the house not 2.

Right, if you re-invest... I read the other replies as, as long as you don't profit over $250K, you don't get taxed? I would think our sleezy gov't would take all the $ they can!!!! So, I'm thinking that if you don't reinvest this money, you'll pay capital gains on the profit made.

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Posted by mv1003

Right, if you re-invest... I read the other replies as, as long as you don't profit over $250K, you don't get taxed? I would think our sleezy gov't would take all the $ they can!!!! So, I'm thinking that if you don't reinvest this money, you'll pay capital gains on the profit made.

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You will not pay capital gains. If you had to pay capital gains... the link I provided (thats from a law forum) would have said you had to pay them.

Read the link again and it gives you all the information.

It also doesn't say anything about avoiding the tax by 're-investing' if you lived in the place for under two years. That is not true... no matter what financial advisor thinks it might be. Maybe that accountant is using some sort of crooked loophole to get out of the tax. But I doubt its very legal.

If you have a link to prove me wrong otherwise... i'd like to see it cause I want to get the story straight myself.