When Do I Have to Pay Capital Gains Taxes?

When you prepare to sell your home, you might wonder if you have to pay taxes on the capital gains from the sale. Many home sellers never have to pay capital gains taxes, due to an exclusion that is available for people selling current or former primary residences. In these four instances, you may have some tax liability.

Vacation Homes

Capital gains taxes are considered on every property you sell, but there is an exclusion for certain circumstances. If you live in a home for two of the past five years as an owner, you may be able to exclude as much as $250,000 (filing as a single person) or $500,000 (married filing jointly) of the gains on your taxes. You can see how most people who qualify for the exclusion will easily erase their tax liability. If you own a vacation home, your eligibility depends on whether or not you ever lived in it as a primary residence. If you did not live in the home before buying it to use a vacation property, you will be required to pay taxes on the difference between the price you paid for the property and the amount of the sale.

Rental Properties

When you buy a home as an investment property, be it in Dolores or elsewhere there is a good chance that you will never live in it as a homeowner. In order to qualify for the exclusion on your capital gains taxes, it must be your primary residence for a portion of the past five years. If you lived in the property for some time, but not a full two years, you may be able to exclude a portion of the capital gains relative to the amount of time you lived in the home in the past five years. As a result, it may be wise to consider selling a former residence that you are keeping as an investment property within five years of the original purchase.

Short-Term Ownership

The full exclusion of capital gains tax liability requires you to own the home for a minimum of two years. People who only own a home as a primary residence for a shorter period of time may still be able to claim a portion of the exclusion. For example, if you live in the home for 18 months before you sell it, you may be qualified to exclude 75 percent of the maximum, which would be $187,500 for a single person or $375,000 for married filing jointly. Should you expect a significant increase in the value of the home during this short term, you might consider keeping the home long enough to qualify for the full deduction, if possible.

Other Scenarios

The way capital gains are taxed for multiple owners of the home depends on their circumstances, and how they file their taxes. A married couple that divorces but retains co-ownership of the home might change the capital gains tax liability when the home is sold. The same is true for people who purchase a home together, but only one person lives in the home as a primary residence. The maximum amount each person can exclude is $250,000 in different filing scenarios, but each person must qualify for the exclusion individually.

Paying capital gains taxes is something most home sellers hope to avoid. In these cases, you may owe money, but there are some alternatives to help minimize the damage.