Understanding Real Estate Capital Gains on
Sarasota Real Estate Property Sales
When you sell a stock or most any asset, you owe taxes on your "capital gain" - the difference between what you paid for the asset and what you sold it for. The same
is true with selling a Sarasota home (or a second home), except that there are some special considerations that benefit you when the Sarasota real estate property you sell is your home.
Homeowners already know the many tax breaks that Uncle Sam offers, most notably mortgage interest and property tax deductions. But there is even more good tax news for home sellers. Many Sarasota Florida home sellers won't owe the Internal Revenue Service any taxes at all on the profit they make on a home sale.
First, on real estate sales, capital gains are based not on what you paid for the home, but on its adjusted cost basis.
To calculate the capital gain on the sale of real estate:
To the purchase price you paid for the property, add:
- Cost of the purchase-including transfer fees, attorney fees, inspections, but not points you paid on your mortgage.
- Cost of sale-including inspections, attorney's fee, real estate commission, and money you spent to fix up your home just prior to sale.
- Cost of improvements-including room additions, deck, etc. Note that such improvements do not include repairing or replacing items that were in the home when you bought it, such as replacing a water heater or putting on a new roof. These are "maintenance items," not "improvements."
The total of this addition is the "adjusted cost basis" of your home.
Now, subtract this "adjusted cost basis" from the amount you sell your home for. This is your "capital gain" on the sale.
Second, and this is where the sale of Sarasota real estate becomes different from other asset sales, there's a Special Exemption for Certain Real Estate Capital Gains.
Since 1997, up to $250,000 in such capital gains ($500,000 for married couples) on the sale of a Sarasota Florida home is exempt from taxation if you meet the following criteria:
- You lived in your Sarasota home as your principal residence for at least 2 out of the last 5 years.
- You haven'tt sold or exchanged another home during the 2 preceding years.
The property you're selling must be your principal residence. You have lived in it for at least 2 of the last 5 years. This tax break doesn't apply to investment property where the usual capital gains rules apply.
But, you can turn an investment property into your "principal residence" making it eligible for the exclusion by living in it as your "principal residence" for 2 years.
As of 2003, if you don't meet these requirements, you may still qualify for this exemption if you meet certain "unforeseen circumstances" defined by the IRS such as job loss, divorce, or family medical emergency.
Another bonus of the new IRS rule is that you don't have to buy another home with your sale proceeds. You can use the money in any way you wish.
Even better, there's no limit on the number of times you can use the home-sale exemption. You can make tax-free profits of $250,000 (or $500,000 if you're married) every time you sell a home.
Tax laws and IRS rulings are always subject to change. So, as with any transaction, consult a competent
Sarasota Florida realtor, an attorney and a tax
accountant for further information. We all want to take advantage of every
tax break and the sale of Sarasota real estate should be no exception.