Massachusetts Real Estate

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Real Estate Capital Gains When Selling Your Home

As a Realtor working in Metrowest Massachusetts for the last twenty three years, it surprises me how often people do not realize the current tax laws regarding capital gains when selling their home.

The new capital gains tax law actually went into effect in 1997 and is known as the Taxpayer Relief Act of 1997.

The current capital gains tax law when selling your personal residence allows for an exclusion of up to $250,000 in profit if you are single and $500,000 if married. In order to be eligible you must have lived in your home for two of the last five years. Again it must be your personal residence and can not be an investment property.

You can use this capital gains exclusion as many times as you like as long as it meets the above criteria. As an example lets say you were fortunate to purchase your home for $400,000 and it is now worth $700,000. Your $300,000 in profit or gain would not be taxed.

So what happens if you are going to make more than $500,000 in profit? Under the current tax plan you would be taxed at a 20% capital gains tax rate on the amount over the $500,000 threshold.

As far as living in the home for two out of the last five years there are no hard and fast rules regarding this. You could have lived in the home the 1st year, rented it the next three, and lived in it again in the last year and you would be fine as far as the exclusion goes.

There is a new law that just went into effect as of January 1st 2009 that closes a tax loop hole in the Capital Gains law. The recently signed 2008 Housing and Economic Recovery act has placed new restrictions on wealthy home owners who own two or more homes and plan to hop from one home to another to avoid paying capital gains.

Some home owners have avoided paying the capital gains tax by selling their primary home, claiming a full tax exclusion and then moving to a second or third home that they have owned for some time, making it their primary residence and then turning around and selling the home paying little or no capital gains tax.

The new modification says that the gain may not be excluded for periods of "non qualified use", basically the period of time when the home was not used as the taxpayer's primary residence.

 

While being married does offer the benefit of a larger tax exclusion, couples also have some other considerations when it comes to determining whether the home sale is tax-free or not.

Under the law, either spouse can meet the ownership test. For example, the IRS says it's OK if you owned the home for the last two years, you get married and you decide you want to add your spouse to the title. In this case, lets say the marriage is a year old.                                                                                       

Since one of you owned the residence for the required time, as joint filers you have no problem meeting the ownership test even though your spouse wasn't an official owner for that long.

Both parties however must pass the use test. Each of the spouses must live in the residence for two years. One thing to note is that the shared use doesn't have to be while you file jointly. If you and your spouse shared the home for one and a half years before getting married and then six months as newlyweds, the IRS will allow you to claim the exemption. But if your spouse did not move in until the wedding day, you're out of tax-exclusion luck.

One other thing to keep in mind under this couple requirement is that if either spouse sold a home and used the exclusion within two years of the sale of any jointly-owned property, the couple can not claim the tax exclusion. This means if your new spouse sold their home a few months before the wedding, then you will have to wait two years after that property's sale date before you can sell  your shared marital residence tax-free.

Even if you don't meet all the home sale exclusion tests there are certain circumstances where you still may be eligible for a tax break. When you need to sell your home because a change in health or a long distance relocation, you may be be able to get a pro-rated tax deduction. If you pass the requirements of this kind of case, you would calculate the fractional time your were in the home. For example if you were in the home for half the time and were relocated to another state you would be able to claim 12 out of the 24 months of exclusion or half the amount of the exclusion ($125,000).

If you are in the armed services there is also a special provision regarding the capital gains law as well. A law instituted in 2003 now exempts military personnel from the two-year use requirement for up to 10 years, letting you qualify for the full exclusion whenever you must move to fulfill your service commitments.

The information contained here in is believed to be accurate, however every person's individual tax situation may be different, therefore before acting on the information contained herein, the reader is urged to consult a qualified tax accountant or attorney.

Home ownership certainly has tax advantages. When completing the purchase of a home there are other  deductions you need to remember.

See also:

Massachusetts Capital Gains Tax

Tax deductions to remember when getting a home loan.

_____________________________________________________________________________________________________

About the Author: The above information on Real Estate capital gains when selling your Massachusettsremax executive realty Hopkinton Massachusetts home was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. 

Have a home to sell in Metrowest Mass? I have a passion for Real Estate and love to share my marketing expertise! 

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I service the following towns in Metrowest Massachusetts: Hopkinton, Milford, Upton, Southboro, Westboro, Ashland, Holliston, Mendon, Hopedale, Medway, Grafton, Northbridge, Uxbridge, Franklin, Douglas, and Framingham MA.

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50 commentsBill Gassett • January 12 2009 08:09AM

Comments

Great information for your readers Bill, and timely with tax season approaching.

Posted by Susie Blackmon, Ocala, Horses, Western Wear, Horse Farms, Marketing almost 6 years ago

Great information...and I love the picture of the "tax man"  LOL !!

Posted by James Downing - Metro DC Houses Team REALTORS®, CRS, GRI, ABR,MRP, MilRes, When Looking to Buy or Sell - Make the Right Move (Real Living | At Home) almost 6 years ago

Since I was a tax accountant in my previous life, I'm aware of these rules, but as you point out many aren't.  It seems like the old rules are what everyone remembers.  Great job in making the tax law very easy to understand...  nice oxymoron in my opinion

Posted by Judy Greenberg, Coldwell Banker - Buffalo Grove - Long Grove Homes (Coldwell Banker Buffalo Grove- 350 Half Day Road ) almost 6 years ago

Good post.  As a licensed CPA and member of the AICPA, I never wear my Realtor cap when I provide accounting advice and vice versa.  However, I would like to suggest that you add a disclaimer that "every person's individual tax situation may be different, therefore before acting on the information contained herein, the reader is urged to consult a qualified tax accountant or attorney."

Posted by Martin Kalisker, Synergy Metrowest, Inc.: MA Real Estate & More (Synergy Metrowest, Inc.) almost 6 years ago

Hi Bill, This is one of my favorite tax laws. We take full advantage of it by moving every few years.  The last move 4 years ago was just 12 houses up the street. We put our house on the market yesterday. It's time to do it again. 

Posted by Jen Bowman, Realtor - Anna Maria Island & Bradenton FL (Keller Williams Realty) almost 6 years ago

Susie & James - Thanks I appreciate the compliment. The favorite time of year everyone loves is approaching fast:)

Judy - It seems there are folks still in the dark about the capital gains laws as people do still ask about their cost basis from a previous home sale ect.

Weichert - Good suggestion. I am going to add the disclaimer to the article.

Posted by Bill Gassett, Metrowest Massachusetts Real Estate (RE/MAX Executive Realty) almost 6 years ago

Excellent reference Bill.  Assuming, of course, that someone has been successful in selling a property that produces a capital gain. 

That's a joke.

 

Posted by Lenn Harley, Real Estate Broker - Virginia & Maryland (Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate) almost 6 years ago

Hi Bill - Excellent information for home owners.  Tax issues related to home ownership and selling are important for all of us to keep in mind.

Posted by Jon Wnoroski, Summit County Realtor (America's 1st Choice RH Realty Co., Inc.) almost 6 years ago

Jenn - I knew of a few people who were really taking advantage of the capital gains laws by selling their home avery two years. With the market the way it has been over the last few years though they have not had the ability to make it work.

Lenn - Point well taken! Of course this is one of the better home ownership laws that was ever put in place.

Posted by Bill Gassett, Metrowest Massachusetts Real Estate (RE/MAX Executive Realty) almost 6 years ago

Lots of great information here in this post. There is a lot we need to know in order to assist our clients. One is to say "ask your tax professional"

Posted by Scott Guay, Associate Broker. Ocean City and Ocean Pines MD (Berkshire Hathaway Home Services PenFed Realty) almost 6 years ago

Great reminder and clarification. Thanks Bill !

Posted by Sheldon Neal, That British Agent Bergen County NJ (Bergen County, NJ - RE/MAX Real Estate Limited) almost 6 years ago

Great info Bill.  I hope there are still people in America that can sell their home for a profit of $500K!  ; )

Posted by Pam Pugmire, Meridian Idaho Real Estate (Silvercreek Realty Group) almost 6 years ago

Nicely explained an illustrated.  It is certainly something for people to consider when they are in the real estate market and it can be very advantageous. 

Posted by Joan Whitebook, Consumer Focused Real Estate Services (BHG The Masiello Group) almost 6 years ago

Way to get people thinking about the positve aspects of real estate- like PROFIT!!! Great informative article that I bet the average consumer doesn't know. Good post!

Posted by Kristi DeFazio, Colorado Springs Rea lEstate 719-459-5468 (RE/MAX Advantage) almost 6 years ago

Bill, you explained this very well, I do agree with the disclaimer. I have found myself saying the words "contact a professional XXX" more these days! 

Posted by JO SOSS, Kitsap County WA Real Estate - HOMEFRONT Realty (HOMEFRONT Realty) almost 6 years ago

Bill - great stuff. I have also found many folks who are not aware of the tax changes, adnd I always recommend that they consult a CPA to understand their personal situation. The disclaimer is a good idea - glad someone else suggested it.

Jeff

Posted by Jeff Dowler CRS, Carlsbad CA Homes for Sale (760) 840-1360 (Solutions Real Estate ) almost 6 years ago

Jon - Thanks. With tax season approaching fast I am going to write a couple of articles relating to taxes and selling a home.

Scott - Consulting a tax professional is always good advice.

Sheldon & Pam - There are certainly fewer that have to worry about having a taxable gain.

Posted by Bill Gassett, Metrowest Massachusetts Real Estate (RE/MAX Executive Realty) almost 6 years ago

great post, and great info, I say this grudgingly because it seems like tax season just left and now in the blink of an eye it is here once again.

Posted by James Wexler (wexzilla.com) almost 6 years ago

This is great information and should definitely be in a brochure :) 

Posted by Celeste "SALLY" Cheeseman, (RA) AHWD CRS ePRO OAHU HAWAII REAL ESTATE (Century 21 Liberty Homes) almost 6 years ago

Great informative post.  In Atlanta we're not worrying so much about the gains.

Posted by Jim Crawford, Jim Crawford Atlanta Realtor - Atlanta Real Estate (RE/MAX Paramount Properties) almost 6 years ago

Bill, another well deserved feature! Excellent information - AND - I, too, am amazed at how many people don't understand that the law changed 11 yedars ago. ;-)

Pepper

Posted by Mesa, Arizona Real Estate Mesa Arizona Realtor (Teri Ellis at Homes Arizona Real Estate LLC) almost 6 years ago

Bill~As always, another informative and easy-to-understand post. As I shared in a recent post myself, we can't always assume that consumers know what the rest of us within the industry know.

Posted by LaShawn Norden, REALTOR, (321) 377-0157, Your Real Estate Advocate in Central FL (Keller Williams Heritage Realty) almost 6 years ago

Everyone thanks for all your great comments on the capital gains laws when selling your home.

Posted by Bill Gassett, Metrowest Massachusetts Real Estate (RE/MAX Executive Realty) almost 6 years ago

Thanks Bill .. as always full of great information!  pippa

Posted by Pippa Mac, The Woodlands TX Real Estate (Chevaux Group Realtor, The Woodlands and Spring) almost 6 years ago

Thanks for the refresher course!  Love your "tax man" pic, just as I imagined him!  Now let's hope from some home sales profits to worry about capital gains on!

Deb

Posted by Debbie Hutchins almost 6 years ago

Bill, this is a great post! It's our job to educate our Buyers and Sellers to this knowledge. I have talked Sellers into waiting a bit so they could take advantage of the tax law. Thank you so much for the reminder to all of us. This is important info.

 

Posted by Deb "Alayne" Brooks, 940-500-4010 Wichita Falls Real Estate (Alayne Brooks, Re/Max Elite Group, Wichita Falls Texas) almost 6 years ago

As always, great information for you Bill.  I wish I could just re-blog everything you write but that really wouldn't be appropriate ;)

Posted by Marlene Pellegrini almost 6 years ago

Bill That is excellent information especially for someone who bought their home prior to 2002 and will have a gain.  Karen

Posted by Karen Kruschka, - "My Experience Isn't Expensive - It's PRICELESS" (RE/MAX Ultimate) almost 6 years ago

Bill,

This is not a good time for Congress to change the capital gains tax.

I don't think it has to be exactly the way it is but any major changes that i hear about are not good.

Richard

Posted by Richard Stabile, Bergen County New Homes Builder Realtor (REMAX real estate associates) almost 6 years ago

It is always good to refresh your memory on this subject.  Thanks

Posted by Rebecca Gaujot, the GO TO REALTOR, Lewisburg WV Real Estate, Greenbrier County (Coldwell Banker Stuart & Watts Real Estate) almost 6 years ago

Good info - it reminds me why we pay good money for good tax advisors!

Posted by Richard & Carol DeGrace, Mortgage Loan Officers NJ 609-209-3700 (1st Colonial Community Bank | Bank - New Jersey) almost 6 years ago

Great information Bill! The comment from Lenn is terrific ... but hopefully we won't  always think it is a joke when talking about capital gains!

Good idea about adding the declaimer as well.

Posted by Terrie Leighton, Reno Real Estate Agent ~ Selling Homes in Reno (Ferrari-Lund ~ Reno's Premier Real Estate Company) almost 6 years ago

Thanks for this information. I had a couple of sellers ask me this question recently. I told them to talk to their accountants because I wasn't completely sure. Now I know.

Posted by Kelsey Barklow, 423/948-9154, Marne Drinnon 423/202-2277 (Evans & Evans Real Estate) almost 6 years ago

Richard - Hopefully the Capital tax gain law will not change as this is one of the better reasons why home ownership is better than renting.

Kelsey the basics of the capital gains law is pretty simple. It does get a little more complex when you are talking about a married couple and when exactly you become eligible for the tax exclusion.

Posted by Bill Gassett, Metrowest Massachusetts Real Estate (RE/MAX Executive Realty) almost 6 years ago

Good info.  I feel like I could have explained most of this with a certain amount of authority to a client but it really helps to have it in writing to support what hangs dubiously in my gray matter.

Posted by Kent Anderson, from Schweitzer to the Lake (Coldwell Banker Realty-Schweitzer Mountain, Sandpoint, Idaho) almost 6 years ago

Great blog, very informative for anyone to read.  Thank you for getting it out to us.

 

Patricia Aulson/  Portsmouth NH Real Estate

Posted by Patricia Aulson, Realtor - Portsmouth NH Homes-Hampton NH Homes (BERKSHIRE HATHAWAY HOME SERVICES Verani Realty NH Real Estate ) almost 6 years ago

Thanks for sharing I hadn't thought about the TRA for quite awhile. I always like refreshing up on these programs. You never know uh.

Posted by Charles Stallions, 800-309-3414 - Pensacola, Pace or Gulf Breeze, Fl. (Charles Stallions Real Estate Services ) almost 6 years ago

Bill:  Thanks so much for an excellent post.  Lots of very useful information... both for me and for my clients.  Thanks for sharing...

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) almost 6 years ago

Bill, this is an important post for consumers to understand. As Realtors, of course we aren't CPAs or loan officers, but as professionals, we do touch upon their areas in educating our buyers and sellers as to broad concepts and then they check with their CPA, etc., to verify their individual situation. This is part of how we add value to our clientele. I can't imagine knowing this and not sharing it with a Seller who was trying to make a financial decision about whether to sell or not.

Posted by Sharon Alters, Your Fleming Island Relocation Agents. (Coldwell Banker Vanguard Realty) almost 6 years ago

Good article.  If you are getting married and then starting to decide whether to file jointly or seperately, selling a home or not.  Use a little tax planning in addition to the wedding planning.

Posted by Mike Henderson, HUD Home Hub - 303-949-5848 (Your complete source for buying HUD homes) almost 6 years ago

Hi Bill,

Great information. I was not aware of the distinction between two individuals under the same roof and how it applies to occupancy for 2 years  vs. married for 2 years. Thanks!

Posted by Lynda Eisenmann, Broker-Owner,CRS,CDPE,GRI,SRES, Brea,CA, Orange Co (Preferred Home Brokers) almost 6 years ago

Bill,

Another well deserved featured post with good and timely information. Thanks for sharing.

Posted by Margaret Rome, Baltimore Maryland, Sell Your Home With Margaret Rome ( HomeRome Realty ) almost 6 years ago

Too many people in this part of the world don't need to worry about this :raising one eyebrow:  Thanks for the most informative post :)

Posted by Renée Burrows, Las Vegas Real Estate Broker - www.urLVhome.com (Savvy Home Strategies Realty, LLC-REALTOR®-Estate-Probate) almost 6 years ago

...And of course, you should consult a tax professional if you would like more information.

Good idea for a post!

Posted by Jeff R. Geoghan, REALTOR, Marketing VP & Real Estate Agent Coach (Coldwell Banker Select Professionals) almost 6 years ago

Bill - This is a topic that is usually misunderstood.  You managed to provide a clear and understandable explanation which will be appreciated by many.

Posted by Jennifer Fivelsdal, Mid Hudson Valley real estate connection ( JFIVE Home Realty LLC | 845-758-6842|162 Deer Run Rd Red Hook NY 12571) almost 6 years ago

Bill, Great refresher info about the capital gains tax and bring this info to home owners, sadly many in this area can not use it.

Posted by Eva Aliaga, Boca Raton & Delray Beach: SE Florida Real Estate (Keller Williams Realty Boca Raton IdealFloridaLiving.com) almost 6 years ago

I found this as re-blog elsewhere and just wanted to drop by and let yon know that I think this is such important information for sellers to have and that it's nicely done.

Posted by Christine Donovan, Broker/Attorney 800-610-7253 DRE01267479 - Costa M (Donovan Blatt Realty) almost 6 years ago

hey Bill - excellent article and great info in simple terms which is what every one prefers, thanks

Posted by Randall Sandin, 843-209-9667 - Search for Charleston SC Real Estate (Carolina One Real Estate) almost 6 years ago

This is such excellent info (can I re-blog?) I love how well you've explained it and organized it. Fantastic!

Posted by Mara Hawks, Inactive-2012 REALTOR - Homes for Sale Auburn Real Estate, AL (First Realty Auburn ) almost 6 years ago

Thanks everyone for all your great comments about the capital gains tax laws!

Mara - Of course you can re-blog the post. It would be my honor!

Posted by Bill Gassett, Metrowest Massachusetts Real Estate (RE/MAX Executive Realty) almost 6 years ago

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