Capital Gains

[jnevi9nr]

If I bought a home and sold it a year and a half later, how much capital gains would i owe to the fed and the State of VA on the profit? What if I did some capital improvements to it (fence, deck, etc).  Is it a flat rate or is it prorated? Do I subtract out the capital improvements from the profit?  Are there other reductions - closing costs?  Please provide an example of the math for me if possible.

[SundayInSalem]

It depends. IRS and Virginia allow you to exclude up to $250,000 ($500,000 if married filing jointly) of profit from the sale of a home if you owned and lived in it for two of five years.

You may qualify for a partial exclusion for 18 months if you meet certain requirements, such as a move for work- or health-related reasons.

Does Your Home Qualify for a Partial Exclusion of Gain?

Profit from a home sale is: Sales price - Sales expenses less (Cost + Improvements) = gain/loss. Any home sale exclusion would be further subtracted from that profit.

Any capital gain from your home sale would be added to your other capital gains. The rate is based on your total income.

See What Are the Capital Gains Tax Rates for 2021 vs. 2022? by Kiplinger.

[PoojaT27]

Hello,

Thank you for participating. 

In certain cases, you can treat part of your profit as tax-free even if you don't pass the two-out-of-five-years tests. A reduced exclusion is available if you sell your house before passing those tests because of a,

• change of employment,
• change of health, or
• other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy.

So, if you need to move to a bigger place to find room for the triplets, the law won't hold it against you.

The cost of any improvements that added value to your home, prolonged its useful life, or gave it a new or different use get added to the cost of the house when calculating the profit on the sale. Closing costs that you paid are deductible when calculating the profit from the sale of your home. 

The article attached below has more information including examples:

Tax Aspects of Home Ownership: Selling a Home