11 May
Comments (0)

How to Make $500K Tax-Free: A Deep Dive on Capital Gains | By Lisa Ha

If you own a home and are thinking about selling, it’s essential to understand the tax implications of selling it. Specifically, you’ll want to know about the capital gains tax, which is the tax you must pay on the profits you make when you sell your property. Fortunately, there is a tax exemption available to homeowners who have lived in their primary residence for at least two of the past five years. This exemption can save you a significant amount of money and is something every homeowner should be aware of.


What is Capital Gains Tax?

Capital gains tax is a tax on the profit you make when you sell an asset, such as a property, that has increased in value since you acquired it. The amount of tax you owe depends on your taxable income and how long you held the asset.


What is the Capital Gains Tax Exemption?

The capital gains tax exemption is a tax benefit available to homeowners who sell their primary residence at a profit. Under current tax law, if you’ve lived in your primary residence for at least two of the past five years before selling it, you may be eligible for an exemption of up to $250,000 of the profit if you’re a single taxpayer, or up to $500,000 if you’re married and file jointly. This means you won’t have to pay any capital gains tax up to that amount.For example, if you bought a home for $1,000,000 and sold it for $1,200,000 after living in it for at least two years, you would be eligible for the exemption. Since your profit is $200,000, you wouldn’t owe any capital gains tax on that amount, assuming you meet all the other requirements.


Who Qualifies for the Capital Gains Tax Exemption?

To qualify for the capital gains tax exemption, you must meet the following criteria:

  1. You must have owned and used the property as your primary residence for at least two of the past five years before the sale.
  2. You must not have taken the capital gains tax exemption for another property in the past two years.
  3. You must not have acquired the property through a 1031 exchange in the past five years.
  4. You must have a capital gain on the sale of the property.
  5. If you meet all of these criteria, you can claim the exemption on your tax return for the year in which you sold the property.


Why is the Capital Gains Tax Exemption Valuable?

The capital gains tax exemption is valuable because it allows homeowners to keep more of their profits when they sell their primary residence. Without this exemption, homeowners would have to pay a significant amount of tax on the profits they make when they sell their property, which could make it difficult to afford to buy another home. By taking advantage of the exemption, homeowners can save money on taxes and use the proceeds from the sale to purchase their next home.