Capital Gains Tax Laws and Loopholes

What is Capital Gain?

Simply capital gain is the taxable profit on the sale of an appreciated property.

Who Pays capital gains?

Mostly this is a tax for real estate investors when selling a rental property or other investment that would not be there primary home. The other way one can end up paying capital gains tax is when selling a home that has been lived in for under 2 years, however there are exeptions to these rules which I will explain below. The IRS bases the capital gains tax on the capital gain(just the profit). When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, $500,000 if you're married(good reason to be married), and not owe any capital gains taxes.

Capital gains Tax Test:
A test you can do to tell wether or not you will have to pay capital gains taxes:

1)Ownership Test: During the 5-year period ending on the date of the sale, you must have owned the home for at least 2 years.




2)Use Test: During the 5-year period ending on the date of the sale, you must have lived in the home as your main home at least 2 years.

Keep in mind:

~There are exemptions to the 2 year rule below.
~Members of the military also get special home-sale consideration.
~I am a Realtor not a CPA. Please consult your taxman for solid adivce regarding taxes

Capital Gains Exemptions:

Avoiding capital gains before 2 years: There are also a few loopholes if you have not lived in your primary residence for 2 years yet and you would like to sell. If you did not meet the requierments of the ownership test above maybe you fall into one of these exemptions:

1. Employment loophole: The sale of your main home is because of a change in place of employment if your primary reason for the sale is a change in the location of employment of a qualified individual. The new place of employment has to be at least 50 miles farther from your home than the former place of employment was (or, if there was no former place of employment, the distance between your new place of employment and the home sold is at least 50 miles).


What is pretty interesting is that it can be just about any member of your household and also employment is also defined as Self-employed, interesting indeed.


2.Health Reasons Loophole: The sale of your main home is because of health if your primary reason for the sale is to obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual. For purposes of this reason, a qualified individual includes, in addition to the individuals listed earlier, any of the following:


~Parent, grandparent, stepmother, stepfather.
~Child, grandchild, stepchild, adopted child.
~Brother, sister, stepbrother, stepsister, half brother, half sister.
~Mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, or daughter-in-law.
~Uncle, aunt, nephew, niece, or cousin.


3. Unforeseen circumstances Loopholes:The sale of your main home is because of a circumstance that is out of your control. If your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home. There are a few interesting ones that I did not even know about:
~An involuntary conversion of your home.
~Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home, whether or not your loss is deductible.
~In the case of qualified individuals (listed earlier under Change in Place of Employment):
~Death
~Unemployment
~A change in employment or self-employment status that results in your inability to pay ~reasonable basic living expenses*
~Divorce
~Multiple births from one pregnancy.

Reasonable basic living expenses defined:

Amounts spent for food.
Amounts spent for clothing.
Housing and related expenses.
Medical expenses.
Transportation expenses.
Tax payments.
Court-ordered payments.
Expenses reasonably necessary to produce income.

www.irs.gov refferances:
Topic 701 - Sale of Your Home
Publication 523 (2005), Selling Your Home
Frequently Asked Tax Questions And Answers about capital gains
Other capital gains and losses
If you have a gain that is not excluded you must report it on Form 1040, Schedule D (PDF).
Other resorces:
A capital gains Tax calculator from www.for1031.com
More infomation

With highest Regards,

Brian Barringer
Real Estate Buyers Advocate

209-613-8945

800-894-7282

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