The Massachusetts real estate market has fully bounced back from the downturn 10 years ago. Home prices have been steadily rising and people are actively buying and selling properties. Many have managed to build equity again. If you are looking to sell your home and have accumulated significant equity, capital gains tax may be a concern. Here’s what you should know about capital gains tax when selling a home in Massachusetts.
Exclusion for Primary Residences
If the home you are selling was a primary residence for you during 2 of the last 5 years, then you’re in luck. You are excluded from paying capital gains tax when selling a home in Massachusetts if your profit is less than $250,000 (or $500,000 if married). Let’s clarify the timeframe requirement.
Assume that you lived in your home for 10 years, but 2 years ago, you decided to move in with your children. Rather than selling, you kept your old home as an investment property. You have been renting it out for 2 years now. If we look at the previous 5 year time period, you lived in your home for the first 3 rented it for the remaining 2. You qualify for the exemption since you occupied the home for 2 out of the last 5 years.
The time frame does not need to be consecutive. If you lived in the home during year 1, rented it for 3 years, and then lived in it again for 1 year, you still meet the 2 out of 5 requirement. Let’s take it a step further and assume you moved out 6 years ago. You can re-establish it as a primary residence by living in the home for the next 2 years before selling.
Calculation of Profit
How is profit calculated for the purpose of capital gains taxes? Although many assume it, it’s not merely how much cash you walk away with at closing. Instead, it’s a calculation based on selling price, original purchase price, cost of improvements, prior depreciation, selling expenses, etc. Contact your accountant for an estimate of your potential profit from the sale of your home.
If you own a multiple family property and live in one unit as a primary residence, only that portion of the property qualified for capital gains exemption. The remaining is strictly an investment property and is subject to capital gains tax. For instance, if you own a duplex, only half of the property qualifies for the exemption. One way around this is to live in each unit for 2 years before selling. This way, each would have been a primary residence for you during 2 of the last 5 years. This can help you avoid capital gains tax when selling a home in Massachusetts.
Percentage of Capital Gains When Selling a Home in Massachusetts
If you exceed the threshold for capital gains exemption, you will pay capital gains tax on any profits over the threshold (not on the entire profit). There is both federal and state capital gains tax. Federal capital gains ranges from 15% to 25%, depending on your income level and filing status. In Massachusetts, for short term capital gains (property held for one year or less is) the tax rate is 12% and for long-term capital gain (property held more than one year) the tax rate is 5.2%. These rates apply to the current tax year and is subject to future change. Again, consult with your accountant for more details. As mentioned above, please contact your accountant or tax preparer to calculate the capital gains on a sale of real estate. Our focus at Simmons & Schiavo, LLP is to assist our clients in passing on the maximum amount of wealth to their loved ones. The best way to do this is to utilize tax savings techniques to minimize both capital gains and estate taxes. Book a call with us to learn more about how we can help you implement estate tax savings into your estate plan.
The above information is meant to be a general overview and should not be construed as accounting or legal advice.