Yo what's going on everybody? My name is Ryan, I'm a CPA, and today we're going to be talking about
selling your residential property, selling your home. We're going to talk about capital gains tax,
whether you do have to pay it or not, and all that crap all right. But first I would really
appreciate it if you would please hit the subscribe button if you're new here,
and give this video a like if you will find it helpful, which hopefully you will,
and also leave me some comments and questions down below. If you have any comments, concerns,
questions and I will try to do my best to answer them for you. All right so today capital gains on
selling your home. So your house is a capital asset in the eyes of the IRS. And usually if
you sell an asset that has appreciated in value, kind of like stocks or jewelry or something, then
typically you would pay capital gains tax on it. And you know, it's either long term or short term
depending on how long you've held the assets. But you know, with your primary home there's, you know
things are done a little differently because it is your primary home. There is an exclusion out there
that that may allow you to exclude a lot of your capital gains. And so we're going to talk about
all this stuff today. All right so first I'm going to talk about capital gains. And capital gains
are basically something that you recognize when you sell a capital asset at a profit,
which means if you buy something for one price and then down the road you sell it at a higher price,
that means you have a capital gains, most likely. Capital gains are imposed on capital assets
which are things like real estate, cars, jewelry, stocks, bonds, those kinds of things. You know
things that are kind of like long-term assets. So yeah, that means if you sell, you know vehicles
for a profit, then you likely would have to pay capital gains tax on it. And so you're saying,
wait are you saying that I have to pay taxes when I sell my car? Well most likely not because
remember, like I said if you sell it for a higher price than you purchased it for. And probably over
95% of the cars on the market depreciate in value over time. So you buy a car for 30 grand you sell
it for 20 grand that means you did not profit from it. Whatever amount you have left on the loan,
you know if you financed the car, that doesn't even matter, that's not even a thing that you
need to calculate, it's just your purchase price and your selling price. So for capital gains,
the basic formula is your selling price minus your purchase price, minus any expenses
that you incurred on the sale, and minus any improvements that you made to the property.
That's a very basic formula okay. And this is really related to real estate because you can't
really make improvements to stocks and you know stuff like that. So with real estate you know,
follow that simple formula, you'll get what your capital gain income might come out to
be. Now when it comes to your primary home, your primary residence, there's something a
little different that goes on and that is the capital gains exclusion. This is the Section
121 Exclusion on the IRS tax code and it allows taxpayers to exclude up to $250,000 per spouse.
That means if you're married, up to $500,000. If you're filing single then it's $250,000. And there
are several things that you have to meet in order to qualify for this exclusion. Now this exclusion
means that you know, if you see, if you take that capital gains formula I just talked about,
if it's less than, if your capital gains was less than $250,000 and you qualify for the full
exclusion, that means you technically don't pay any capital gains tax on the sale of that home
okay. And if you're married you know, your capital gains is less than $500,000. So I'm going to go
through the eligibility requirements for this, for the Section 121 Exclusion. And you know you
can judge for yourself and see what it might take for you to qualify. And this is like a,
this could be a huge tax planning thing you know if, for you to avoid you know, massive capital
gains tax since we all know the real estate market is kind of bananas right now. So you know, you buy
a home, and a year later it's probably worth one to two hundred thousand dollars more than
you purchased it, planning around meeting these eligibility requirements could save you a lot
of money in taxes. So the first thing you have to consider is did you acquire the property in a 1031
Exchange in the last five years? If you don't know what a 1031 Exchange is then this probably doesn't
apply to you. So if you did acquire this property in the 1031 Exchange in the last five years, that
pretty much disqualifies you from this exclusion okay. So that's the first test. The second test is
the ownership test. Have you owned this property for at least two years of the last five years?
Okay that's a simple test there, have you owned the property for at least two years?
If the answer is yes, then you meet the second test. The third test is a residence
test. Have you lived in this property for at least two years out of the last five years?
Now the residence test doesn't have to be one block or one chunk of time. You can
live there for six months and then maybe you move overseas for a job or something,
come back, live there for another six months, as long as it all happens within the last five
years. You know, you get a total of 730 days of residence in the property then you meet this test
as well. If you're married, both spouses have to meet this, this residency test okay. So you know,
if you have a married couple, one spouse moves away for a year to do, to do a job or something,
then they technically don't live in this property anymore until they come back. While the spouse
that stayed at home would meet the residence test. So that's important when you're married that you,
both spouses have to meet this test. For the ownership test, only one spouse has to meet that
eligibility requirement. So you know sometimes you have a property that's owned by just one
spouse because they're the income earner and the other spouse is like a stay-at-home parent
then you know, only one ownership, one spouse has to meet the ownership test. The fourth test
is called a look back period. The basics of this test is to make sure you haven't
taken this Section 121 Exclusion in the past two years because you can only take this exclusion
once every two years. So the look back test is just saying hey let's look back the past
couple years, have you taken this specific exclusion on another home that you sold?
If you have, then you might be disqualified for this exclusion this time. So basically if you meet
those criteria then you qualify to exclude up to $250,000 of capital gains per spouse on the sale
of your home. So what does that look like? That means if you, if you you know for most people,
like let's say you you purchased the home 10 years ago for $200,000 okay. Now it's worth $700,000,
let's say that. Let's say a married couple has a $200,000 home that they purchased a while ago,
now it's worth $700,000, and they want to sell it. Now if there was no commission, you know if
there was no selling expenses considered, and if they didn't make any improvements to the property,
just to make this example simple. They would have a capital gains of $500,000.
You know $700,000 minus $200,000. And you know since they've lived there as a primary home for
the past 10 years, and you know they met all these tests, they can exclude that $500,000 gain
from their taxes. So in essence they pay zero taxes okay. A lot of planning can go into this
if you just bought a home recently, and you might want to move to a different home you know,
maybe it's a good idea to just wait another year or what you know, whatever it might take to meet
these eligibility requirements so that you don't pay a massive amount of the capital gains. Now
there are exceptions to some of these rules that could qualify you to a partial gain
because as you know like the residence and ownership tests
basically means you have to own the property for at least two years in order to qualify for any of
this. So if you own the property for less than two years, and lived in there for less than two years,
then there are some things that might allow you to qualify for some of the exclusion.
But if you, as long as you owned the property and lived in it for less than two years,
you will not qualify for the full exclusion. So if you own the property for less than two years,
then a work-related move might qualify you for a partial exclusion. Health or medical related move
you know, if you had to move for health reasons, like if you had to go take care of a family member
because they became terminally ill. That would qualify as a medical related move.
For your job, your job has to have, you know, the job that you take, or the job that you,
that you have right now that relocated you has to be over 50 miles further than your current
job in order for the, the the partial exclusion to qualify. You know you can't just take a job down,
a mile down the road and then just say like oh I had to move for this job
you know to be five minutes closer. That that doesn't work, it's got to be at least 50 miles
okay. So work and health related moves can qualify for partial exclusions. And then the
last thing are like unforeseen events, or disasters, or something like that.
Anything that can be considered a casualty loss would qualify you for a partial exclusion. All
right so that's all I've got. I know it's a very basic overview of this exclusion. If you want to
learn more check out publication 523 of the IRS tax code, I will link it in the description below.
And again, if you're new here please consider subscribing my channel. I would really appreciate
that and again if you found this video helpful smash the like button, rub it, whatever you want
to do with it, caress it, I don't give a shit. Do it to the like button and I would really
appreciate that as well. Yeah that's all I've got. Take care, stay safe, and I'll see you next
time.