Home Appreciation and Capital Gains

Homeownership is part of the American Dream. Homeownership can lead to wealth building because one builds equity as they make payments towards the mortgage. However, when one decides to sell, the equity portion of the home may have tax consequences.

Capital gains tax is the consequence to selling a home for more than one paid. The federal government encourages homeownership, but also wants a chunk of a change when one decides to sell. Mortgage costs, improvements and, and costs involved with the sale (closing costs, commissions, repairs, concessions) but there is still the tax if certain conditions are met.

Fortunately, there are some large safe harbor exemptions to the home capital gains tax. If the owner is a single individual, the first $250,000 in profit is exempt from being taxed. If the owners are married and filing jointly, the individual exemptions can be combined and protect the first $500,000 from being taxed. In most parts of the country, these exemptions will completely protect a homeowner from capital gains tax on the sale of a primary residence. Even if the profits exceed the allowed exemption, taxation is minimized by the amount allowed by the safe harbor exemption.

I am not a CPA and this is not tax advice; a homeowner should seek the advice of their tax advisor to ensure qualifications are met if there are any questions. Some of the requirements include: the individual has to own the home as a primary residence for a minimum of two years. One must also have lived in the home two out of the previous five years. It must have been two years since one tried to claim the exemption on any other home. Exemptions for investment property or second homes cannot be claimed.

Homeownership provides a relatively straight forward saving method and the government promotes it as such by providing the home capital gains tax exemptions. The average American typically does not exceed the exemption limits and homeownership is made possible through many programs. Ask your tax advisor any questions with regard to benefits or tax issues that may arise with homeownership, but know that one of the best investments one can ever make is the purchase of a home.

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