Capital Gains Taxes On Residence - Better Know The New Rules
December 3, 2004
By Srinidhi Goenka
The capital gains taxes on residence are based on
certain rules and regulations. These rules keep on
changing on a regular basis every year. So, if you
are planning to sell your house, then you must be
abreast with the latest clauses for the capital gains
tax.
Earlier, the system was that of you reinvested the
proceeds of the sale of your residence into a new,
more expensive property, then you could avoid the
capital gains tax for residence. This rule did not
consider the time period for which you had lived in
the house that you were planning to sell.
But, according to the new rules, if you stay for less than two
years in your residential property, you will have to pay the full
amount of capital gains tax. But if you stay for more than two years,
then you can get compensation and relief from the tax provided you
fulfill all the given clauses.
Let us take an example to understand the manner in which these
new rules affect our property decisions.
How The New Rules On Capital Gains Tax For Residence Affect Me
Let us say that you own your existing residence for one and a half
years. You purchase price was $295,000 and you plan to sell it for
$373,000. The sale price also includes the commission payable by
amounting to $22,000. Also, you have invested $16,000 in the house
over the years for renovation, maintenance etc. now, you plan to
buy a new house worth $450,000. You are a single taxpayer and pay
25% income tax.
According to the old system, you could have easily avoided the
capital gains tax as you were re-investing the sale money into a
new, more expensive house.
But as per the new rules, this will not hold true. This is because
you will need to reside in your old house for a minimum of two years
before you can sell it in order to avoid the capital gains tax.
In this example, you profit amounts to $40,000.
Sale Price of Old property = $373,000
Less:
Maintenance = $16,000
Commission = $22,000
Cost = $295,000
Total profit = $40,000
Therefore, the tax payable by you would be at the rate of 15% which
would be $6,000. Thus it is important for anyone wanting to sell
their residence to properly understand the capital gains tax rules
before taking a decision.
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