When listing Pasadena real estate, you may be concerned about the tax liability that will come with a profitable sale. What you need to understand is that there are tax exclusions in place that will eliminate the tax on most homeowners. As long as you’ve lived in your home at least 2 of the past 5 years and you’ve not made an exorbitant profit, you probably won’t need to worry about this tax.
As always, confirm tax questions and concerns with a CPA as rules and regulations may change.
Taxing capital gains on Pasadena real estate
The tax only applies to the profit on the sale of a house, so if you make no profit, then there’s no need to worry.
Even if you do profit on the sale of your home, you’re not necessarily liable for the capital gains tax. Individuals can exclude up to $250,000 in profit from the tax, and married couples can exclude up to $500,000 in profit.
To qualify, you must have lived in your home at least two years out of the 5 immediately preceding the sale of your home. (This is to prevent home flippers or other investors from turning over sales with no tax consequence.) You don’t have to live there two consecutive years, however. A total of two years, divided up in any way, qualifies so long as it falls within the 5 years preceding the sale.
If you’re uncertain about the profit on a sale, you can make try out the AMBAR Financial Group capital gains tax calculator.
Pasadena real estate that doesn’t qualify for tax break
In general, you’re allowed to claim the exclusion only once every two years. If you’ve excluded your capital gains on the sale of another home during the two-year period prior to the sale of your current home, you would not be eligible. This means, you cannot sell your main residence — and exclude the gains — then sell your vacation home a year later with the same tax break. If you were to move into your vacation home for two years, then sell it, the tax break would apply.
Some exceptions are allowed
There are some exceptions to the 2-years-out-of-5-rule. These exceptions, if accepted, will usually allow only a partial exclusion from taxes. Exceptions may include relocation by an employer; health concerns; or an unforeseen circumstance (such as unemployment, death or divorce). I recommend contacting a tax attorney for further advice on how to pursue such an exception.
Better understanding the capital gains tax on Pasadena real estate can help you prepare for selling your home and budgeting for your next step.