Are you moving house, selling one and buying another, and the issue of capital gains is playing on your mind? Let's try to clarify some of your doubts.
We want to sell our house to buy a smaller one. We know we have to report this transaction to the tax authorities. How should we proceed? Will we have to pay capital gains tax?
The first question has a simple answer. You must inform the tax authorities through your IRS tax return for the year in which the sale took place. The reason is simple: any profit made on the transaction is taxable, and the tax authorities will calculate the portion that constitutes capital gains.
We would like to take this opportunity to explain how capital gains are calculated:
- The sale price of the house is declared on your IRS tax return. The tax authorities will also ask you for the purchase price and any expenses related to the transaction, such as commissions paid to real estate agencies or the energy certificate.
Over the years, the purchase price has to be updated. Therefore, the tax authorities apply a monetary correction, which varies depending on the year of purchase. Taxpayers simply need to indicate the purchase price.
Any improvement works, such as the installation of a heating system, can also be deducted in the “Expenses and charges” field, provided they have been carried out in the last 12 years. These charges must be documented with an invoice issued in the name of the owner of the property.
When there is reinvestment, as in your case, you may not have to pay.
In the case of the sale of your own permanent residence, which must correspond to the owner's tax address, you may be exempt from paying tax on the profit obtained, depending on the time between the purchase of the new house and the sale of the old one.
If you sell the house first, you have 36 months to buy another one and reinvest the profit obtained. Until then, capital gains tax is suspended, since the owner informs the tax authorities, through Annex G, of their intention to apply the capital gains obtained.
When the purchase of the new home becomes a reality, the tax authorities calculate the profit obtained and confirm that the funds have been used to purchase a new home. However, you must ensure that the new home has officially become the family's own permanent residence within 48 months of the sale of the old home.
Source: idealistanews