Is the gain on my home sale really tax free?

April 30, 2014 by Dave Du Val, EA
Homes surrounded by mountains

Hey Dave,

I bought a house in Arizona in 1996 for $95,000. I did two cash-out refi’s totaling about $30,000 through 2004. I sold the house in 2014 for $165,000, and ended up with a net profit of about $27,000. I have also spent money on remodeling and maintenance through the years. I have been told I have no tax burden from this as I have not exceeded a capital gain of $250,000. Is that true? Should I continue to keep all my records of repairs and improvements or can I trash them? Also, in layman's terms, what are the current rules regarding buying/selling a house and capital gains?

Sincerely,

John

 

Hi John,

If it was your primary residence all those years and never used as business property (e.g. used as a rental or for a home office), you are correct that you would have no tax liability based on the difference between your original basis of $95,000 and the sale price of $165,000, as it would fall under the Section 121 exclusion. (If it was used for business, there may be some gain from depreciation recapture.)

In layman’s terms, the general rule is that if you have owned and lived in the property as your personal residence for at least two years during the five year period ending on the date of the sale (the two years do not have to be consecutive), you can exclude up to $250,000 ($500,000 for Married Filing Joint) from capital gain taxes as long as both you and your spouse meet the rules.  Keep in mind that this is the rule now but that could always change.

You should keep all your records (purchase statement [often referred to as the HUD statement], remodeling costs [not repairs or general maintenance costs as those are not deductible for personal residences]), and the sales statement for at least four years after the tax year when the home was sold (it is three years for federal and four for Arizona).

Deductibly Yours,

Dave

Recent Articles

Closing Costs
Real estate closing costs can be pesky things. And since you are paying for them, can you at least deduct them from your taxes?
Tax Deduction written on a sticky-note
Tax deductions and credits serve the same purpose − to reduce the amount of a taxpayer's tax owed. The way that each serves this purpose is different.
speedometer
In 2019 self-employed taxpayers can deduct their car expenses at the standard rate of 54.5 cents per mile driven for business. However, most employees cannot.
Tax Debt Relief
Millions of individuals and business owners in America currently have unpaid IRS tax liabilities. Here are a few items to consider for tax debt relief options.

SEARCH

 

David E. Du Val, EA
Chief Compliance Officer for TRI Holdco

 

Dave Du Val, EA, is Chief Compliance Officer for TRI Holdco. Inc., the parent company of TaxAudit, and Centenal Tax Group. A nationally recognized speaker and educator, Dave is well known for his high energy and dynamic presentation style. He is a frequent and popular guest speaker for the California Society of Tax Consultants, the California Society of Enrolled Agents and the National Association of Tax Professionals. Dave frequently contributes tax tips and information to news publications, including US News and World Report, USA Today, and CPA Practice Advisor. Dave is an Enrolled Agent who has prepared thousands of returns during his career and has trained and mentored hundreds of tax professionals. He is a member of the National Association of Tax Professionals, the National Association of Enrolled Agents and the California Society of Enrolled Agents. Dave also holds a Master of Arts in Education and has been educating people since 1972. 


 

Recent Articles

Closing Costs
Real estate closing costs can be pesky things. And since you are paying for them, can you at least deduct them from your taxes?
Tax Deduction written on a sticky-note
Tax deductions and credits serve the same purpose − to reduce the amount of a taxpayer's tax owed. The way that each serves this purpose is different.
speedometer
In 2019 self-employed taxpayers can deduct their car expenses at the standard rate of 54.5 cents per mile driven for business. However, most employees cannot.
Tax Debt Relief
Millions of individuals and business owners in America currently have unpaid IRS tax liabilities. Here are a few items to consider for tax debt relief options.
This blog does not provide legal, financial, accounting, or tax advice. The content on this blog is “as is” and carries no warranties. TaxAudit does not warrant or guarantee the accuracy, reliability, and completeness of the content of this blog. Content may become out of date as tax laws change. TaxAudit may, but has no obligation to monitor or respond to comments.