When you are selling your Arizona home, it’s probably with the hope that you will realize a significant profit. Once your property sells, you may decide to take your earnings and invest in another home, pay for a family vacation, or pay off debts. Before making any big plans, you will want to know if you have to pay capital gains, which are taxes on the money earned from the sale. Here is some information to help you understand capital gains and your Arizona home sale.
What is a Capital Gain?
A capital gain is the difference between what you paid for an asset and the sales price. Capital gains taxes can be assessed on profit when real estate, stocks, bonds, and other tangible assets are sold.
Primary Residence Exclusion
When a property owner sells his or her home, the IRS allows them to exclude up to $250,000 of profit realized from the sale, or up to $500,000 for a joint return filed with their spouse, under the primary residence exclusion. As the title implies, to qualify for the exclusion, the residence sold must have been the owner’s primary home.
Generally, to determine if a residence qualifies, the IRS will consider factors such as how long the person has lived on the premises, whether he or she works nearby, and if the location is listed on the owner’s driver’s license, car and voter registration, tax returns, and routine bills.
To qualify for the exclusion, the homeowner must have owned and used the dwelling as his or her principal residence for at least two years in the five-year period before its sale. If a married couple is seeking the exclusion, both must have lived there two out of the five years. However, it is not necessary that the two co-owned the property to claim the exclusion. Additionally, the owner seeking the exclusion cannot have excluded another home from capital gains in the two years before the subject home’s sale. There is no limit on the number of times a homeowner can claim the primary residence exclusion during his or her lifetime. However, the exclusion cannot be claimed sooner that once every two years.
Commercial real estate investors may be able to bypass capital gains taxes under certain circumstances. IRS Section 1031 provides that investment property owners who sell the property and then buy similar, or “in-kind,” property may not immediately owe capital gains taxes on the exchange. These 1031 exchanges allow investors to defer tax payments until such time as they cease selling and buying new in-kind investment properties.
If your Arizona home sale was for business investment purposes, you may be able to sell and reinvest the proceeds as a 1031 exchange. However, before taking action, it is vital that you consult with a qualified real estate attorney to discuss your investment strategy and the possible implications of any transactions.
Laura B. Bramnick is an experienced Arizona real estate attorney who can help you examine all aspects of your Arizona real estate transaction, including capital gains, 1031 exchanges, and other tax consequences. If you are seeking an exceptional, client-driven real estate lawyer in Scottsdale, Phoenix, Sedona and throughout the State of Arizona, contact Laura B. Bramnick to schedule your consultation.