All Things Tax

All Things Tax

Like the title says, from the filing process and tax questions to tax policy and reform, you can search and share All Things Tax here. This is the place to find answers to all your general questions that don't fall under the other categories. And just a reminder: questions about software or online filing should be posted in DIY Products.

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Pioneer
Posts: 1
Registered: ‎08-07-2017

Capital Gains

I have owned this house for 13 years. Moved out after 2 years and used it for a rental for 11 years. Moved back in a little more than a year ago. If I sell this house now, will I have to pay the full amount of the capital gains or will it be reduced because I lived in it for a year+?

Tax Pro
Posts: 5,442
Registered: ‎02-23-2016

Re: Capital Gains

Hi Prodigal2015,

 

Welcome to the H&R Block community.

 

So the rule on this is that (1) the house must be your primary residence (you lived there) for two out of the last five years, (2) you must have owned the home for two out of the last five years, and (3) you must not have taken an exclusion from income on the sale of a home in the last two years in order to be eligible to exclude gain.

 

Because this home has been your primary residence for less than two out of the last five years you will owe tax on 100% of your gain from the sale.  However there are a couple of things that may help reduce the tax.

 

  • You could sell your home through an installment sale so that you receive the income over more than one year.  This would not necessarily lower the capital gains tax but it will reduce your tax liability for each year so that the burden is a little bit less.
  • Take advantage of every deduction & credit that you can in other areas of your tax return.  The more you can take the lower your tax liability will be.

 

In addition, you'll want to be sure and calculate your adjusted basis in the home accurately.  Your adjusted basis is subtracted from the amount you realize on the sale to determine your taxable gain.  If something isn't added into your basis you could end up reporting more gain than you really had.  For instance, let's say you put a new roof on the house last year at a cost of $12,000 and you didn't add that to your basis.  The result is that your gain will be $12,000 higher than it should be.  So make sure that you take a good look at your basis before reporting the sale.

 

Your adjusted basis is calculated by:

PURCHASE PRICE (YOUR COST BASIS) + IMPROVEMENTS - DEDUCTIONS & CREDITS TAKEN FOR ENERGY EFFICIENT SYSTEMS, & CASUALTY LOSSES - ALLOWABLE DEPRECIATION  =  ADJUSTED BASIS.

 

Improvements are things that add value to the home or increase the home's useful life.  As I mentioned previously, a new roof is an example of an improvement.  A paint job on existing walls on the other hand is a repair and does not add to your basis, although repairs completed during the rental years are deductible on Schedule E for the year in which they were completed.

 

Finally, if you were to live in the house until you reach the 2-year mark this time around then you would meet the primary residence requirement and you would be eligible to exclude the first $250,000 ($500,000 if married & filing jointly) of your gain.  Your maximum exclusion would actually be $250,000 ($500,000 if married & filing jointly) less your allowable depreciation (which you have to recapture as taxable gain (taxed at 25%) in order to exclude gain).

 

 

If you have any other questions I'll be glad to help.

 

Louis,

Senior Tax Advisor (Tampa, FL)