Many items that you purchase start decreasing in value
pretty much the moment you purchase them. Fortunately, however, that’s not the
case with all purchases; your home, for example, can end up being a purchase
that actually increases in value. This can happen if you complete renovations
on your home to raise its value or if you purchase a home in an area that later
becomes popular and high in demand. When people experience a rise in their home’s
value, they will often decide to sell their homes and make a profit.
If you’re considering taking this route, you should know
that you may have to pay taxes on any profit you make from the sale of your
home. This tax is called the “capital gains tax,” but, fortunately, there are
ways around it.
The Taxpayer Relief Act of 1997, for example, is one
“loophole” through which many people are able to hold onto the profits from
selling their home, or at least most of the profits. There are other methods that can help you to hold onto profits as well, so before you sell
your home, talk with an accountant or financial adviser to see what options you
have.
House Flipper or
Homeowner?
One important thing to understand is that not all home sales
are treated the same. If you, for example, are someone who purposefully buys
homes, fixes them up, and then sells them at a premium- known as a “house
flipper,” your situation is treated differently by the IRS than that of a
standard homeowner.
A homeowner, for IRS purposes, is defined as someone who has
used the home in question as his primary residence for at least two years out
of five years of ownership. If this rule does not apply to you, you will more
than likely have to pay the capital gains tax. If you’re a true homeowner,
though, there are ways around paying the tax.
Furthermore, there is an exception to the rule if you’re a
true “house flipper,” i.e. someone who regularly buys, fixes up, and sells
houses. When you do this often enough, you can treat your homes as inventory
and have your profits taxed as income.
The Impact of Profit
Something else you should know is that you are not taxed
based on how much you sell your home for. Instead, you are taxed based on the
amount of actual profit you make. There is going to be an “allowed exemption
amount” on the sale of your home, and as long as you don’t go above that
amount, you typically won’t have to pay taxes, providing, of course, that you
meet the IRS’ definition of a true homeowner.
Partial exemptions are also available in many cases, even if
you do go above the allowed exemption amount. The important thing is to work
closely with a tax professional to ensure that, no matter what your situation,
you retain as much profit as possible from the sale of your home.
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