I see it from acquaintances who are looking for houses: sellers receive multiple offers, often over ask, and properties are sold before they even get a chance to swing by for a look!
I loved living in New York City (years ago) and I love living in Miami. To me, Miami is New York with good weather. Everyone is from somewhere else, and came here to work, go to school, or have some fun. I love the cultural diversity, and the physical beauty of the city. Still, I will stipulate that Miami isn’t for everyone. It is expensive. And it can be off-putting when no one around you speaks English. We see clients make this calculation: Hmm. I can sell here for $700,000 and buy twice the house in North Carolina (or many other places) for a lot less and bank the rest. What’s holding me back?
In this blog post, I want to get into one potential issue: taxes. The IRS will tax the gain on the sale of your personal residence. Real estate is capital gains property. You are taxed on the gain over your tax basis. If you bought at, say, $100,000 many years ago and sell today at $750,000, there is a $600,000 taxable gain. But the good news is that not all of that money will be taxable.
Section 121 of the IRS code specifies how gains on the sale of a personal residence will be taxed. If you have lived in the home for 24 out of the previous 60 months, if you are a single taxpayer, you can exclude $250,000 of gain. If you are married taxpayers, you exclude $500,000 of gain. The 24 months need not be consecutive, either. (There are some other rules that apply if the property was in nonqualified use, i.e. it was a rental property but then you moved in yourself, which I’ll not get into here.)
In the example above, $500,000 of your $600,000 gain would be excluded from taxation, and you’d pay capital gains taxes on the remaining $100,000. A salient point for those planning to move away or just downsize.
Old tax law held that if the taxpayer used the proceeds to purchase a new residence, the gain would not be taxed – and many people still think this is true. But it is not. Also, the AMT, or Alternative Minimum Tax, may very well kick in when you have a large capital gain.
What can you do to mitigate any tax gain? Examine your basis. If you can legitimately increase your basis in the property, you can lower the potential taxable gain. If you are married, lived in the property for more than 2 years, and have less than $500,000 in gain, then basis isn't even a concern and you don’t even need to report anything on your tax return.
But if you've lived in the property a long time, chances are you do DO have items of basis increase. These are capital improvements. Not repairs, but improvements. You added a deck. You pulled up the carpet and tiled the floors. New light fixtures. You re-did the bathrooms. These are all improvements and can increase basis. Here’s the rub: you’ve got to be able to document the money spent on these improvements – i.e. have receipts.
No one knows how long this hot market will endure. Miami is certainly receiving the benefit of people and businesses leaving California and New York for warmer and tax-friendly Florida. To people from Silicon Valley and NYC, Miami is still cheap. And of course, we do not have a lot of building area left – we can only go up.
You might be interested in some of my other real-estate themed posts: