As tax season approaches, it's the perfect time to review the financial advantages of owning real estate in New Jersey. Whether you’re a homeowner or investor, there are significant tax benefits to understand, particularly if you sold your primary residence in the past year. Here’s what you need to know about the capital gains tax exemption and how it can help you save on taxes.
Whether you sold a home last year or are considering selling sometimeeee in the future, it’s important to know this tax law (laws always subject to change, this is still relevant as of today).
Capital Gains Tax Exemption: A Major Tax Benefit for Primary Residences
When you sell your primary residence, you may qualify for a capital gains tax exemption, allowing you to keep a significant portion of the profit tax-free. The IRS allows homeowners to exclude up to $250,000 in capital gains if you’re a single filer or $500,000 if you’re married and filing jointly, provided you meet specific eligibility requirements.
Here’s how it works:
Capital gains are the profits you make from selling your home. For example, if you purchased a home for $300,000 and sold it for $600,000, your capital gain would be $300,000. If you qualify for the exemption, you could potentially exclude up to $250,000 (or $500,000 for married couples) from your taxable income.
Requirements to Qualify for the Exclusion:
To take advantage of the capital gains tax exemption, you must meet the following conditions:
Ownership Test: You must have owned the home for at least 2 out of the last 5 years before the sale.
Use Test: The home must have been your primary residence for at least 2 out of the last 5 years before the sale.
Frequency of Use: The exclusion can only be used once every two years, so if you’ve taken advantage of the exemption recently, you may not be eligible again for another sale within that time frame.
How the Exemption Works for Different Scenarios:
Single Homeowners: If you're single and meet the ownership and use tests, you can exclude up to $250,000 of capital gains from your taxable income.
Married Homeowners: If you’re married and filing jointly, you can exclude up to $500,000 of capital gains, provided both spouses meet the ownership and use tests.
Partial Exemption: If you don’t meet the full eligibility requirements, you may still qualify for a partial exemption, depending on your circumstances (such as moving due to health reasons or a job change)
This tax season, talk to your accountant about these tax advantages whether you’ve already sold or are considering selling this year.
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