In 1997, American residential property owners received a significant tax break. The Taxpayer Relief Act granted property owners the advantage of not including the gain on the sale of their houses within broad limits. The old guidelines simply permitted property owners older than fifty five to defer the gain on the selling of their homes by rolling it into the purchase of the new house. Furthermore, this deferral was just available one time for each homeowner; however the current tax rules has effectively swept these restrictions away and provided far more liberal tax breaks with big savings. Today, home owners who qualify can use this exclusion repeatedly. Clearly, this act has saved countless property owners hundreds of thousands of dollars in taxes, and additionally supplied an actual shot in the arm to the real estate business.
However, there are specific provisions that must be met so that you can qualify for this specific exemption. The very first circumstance is just that the house being sold must be your main residence, and not a vacation home or rental property. This condition is really divided into sections:
1. The ownership test - the home owner must have had legal ownership the property for 2 out of the last 5 years prior to the sale of the residence. For instance, in the event the resident rented the home for four years after which he purchased it a year prior to the sale, then they don't qualify for the tax break upon sale as they only owned the property 1 of the last 5 years
2. The use test - to gain the granted tax break, the home sellers must have really lived in the residence for at least two out of the previous 5 years prior to the date of the transaction. The two years don't have to be contiguous; they can be chronologically split up in every way, as long as the total time spent within the house is equivalent to at least two years. So it's okay if three of the last 5 years the home owners loved in Europe for a job opportunity. They can return to the US, sell their home and enjoy the current tax break.
Single taxpayers will exclude $250,000 on the gain of their houses, while joint filers can exclude twice that amount, up to $500,000.So let's say a single person purchased a home years ago for $200,000 and sells it today for $600,000, they have a $400,000 gain. Of that gain $250,000 is excluded and $150,000 is taxed as a capital gain.
For anyone, this really is significant tax relief. But this cash does not have to be used to purchase another home; it could now be used for whatever the home seller wants. In fact, it does not matter how the seller uses the cash as this has no impact on the tax savings. This tax break can only be used by tax payers once every two years. This is a real gift for those who move into homes, fix them up and them move on and do it again. Every 2 years such an owner can enjoy the tax exclusion.
You Pay More Taxes Than NecessaryAnd we guarantee your CPA has never told you The problem with paying taxes is that most people overpay. So if you are concerned about having enough in retirement, you must stop overpaying taxes. I know you think your CPA takes care of this for you. WRONG. I AM a CPA (retired) and I can tell you that 90% of CPAs do nothing more than enter your information into the little boxes on the tax return but NEVER tell you how to pay less next year. Why? Many of them simply do not know what we can show you. In ten minutes.
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