There is an article at Marketwatch here, which lays out how the Taxpayer Relief Act of 1997 altered how capital gains taxes (taxes on the appreciation of a home, ie, the increase in sale price that occurs between the purchase and the sale of a home by a homeowner) are calculated off home sales. If you are thinking of selling your house in this market, it is worth a read.
The summary is, before the Taxpayer Relief Act of 1997, you could sell your primary residence, and you had two years to find a new home of equal or greater value to roll the money from the sale into, so you would not owe any taxes, even on capital gains from the sale.
However after the law’s passage, now you only get an exemption on capital gains of $250,000 for individuals, or $500,000 for couples, on the Capital gains from the sale, which is the sale price minus the tax basis, ie what you invested in the house’s purchase, any upgrades (not maintenance), and sales costs, like real estate commissions.
It is complicated to calculate, as if you previously rolled taxable gains into the purchase of the house, that will affect the basis, and what qualifies as upgrades and not maintenance or repair is similarly complicated. So you will probably want to confer with a tax specialist before making any moves. But what you definitely do not want to do is sell, and spend the money immediately, and then find out you owe taxes on a few hundred thousands in Capital gains.
In addition, there can be other loopholes and considerations, but their application requires a professional’s assistance.
For example, there is what is called a 1031 swap, where if you can convert your primary residence to an investment property prior to the sale, such by moving out and converting it to a rental, then you can exchange that rental for a new property of equal or greater value without owing any taxes. But you will need the assistance of a “Qualified Intermediary” company, and the rules and decisions over what would constitute an investment property, which qualifies vs merely a second home, which does not, are quite complex. There is a good rundown of the 1031 exchange law here.
In addition inherited property can benefit from what is called a “stepped up basis,” where even though you did not purchase the property when you inherited it, they will use the market price when it was inherited as the tax basis if and when you choose to sell it. If your parents purchased a house for $20,000 55 years ago, and they tried to sell it at $1,020,000, they would owe taxes on $1 million worth of capital gains. If, however you inherited it in a hot market when it was worth $1,020,000, and you sold it for that, you would owe no capital gains taxes.
Unfortunately these rules are complex, and IRS rules can change, or even be interpreted differently, so the real lesson is that you are best served educating yourself generally about them, and then availing yourself of the assistance of a professional to be sure the implementation is done precisely, in a way in which it definitely qualifies for any exemptions. But do not rush to sell your house and then expend the money from it, without first consulting with a tax professional.
