Federal Sale of Residence Exemption Lawyers

Where You Need a Lawyer:

(This may not be the same place you live)

At No Cost! 

 What Is Income Tax?

The 16th Amendment to the U.S. Constitution gives Congress the power to create and collect income tax. Eventually, the 16th Amendment led to the passing of the Internal Revenue Code (“IRC”), which is enforced by the Internal Revenue Service (“IRS”). The IRS is the federal government agency responsible for collecting taxes.

The IRC sets the standards for all tax laws, including federal, state, and local tax regulations. According to the IRC, income tax is a type of tax that the government imposes on personal income. An example of this would be how when you receive a paycheck, you may notice that a certain percentage is deducted from the total amount. This deduction generally accounts for different levels of income taxes, as well as state or federal programs, such as Social Security benefits.

If your employer deducts income taxes from your paycheck, this will be reflected when you file your state and federal taxes for the year. When you receive a tax refund or excess payment after you file your taxes, it means that you paid more income tax than was necessary for the year.

It is important to note that not everyone will be subject to income tax laws. An example of this would be how the federal government does not collect income tax from people who are unemployed. Additionally, certain states might not subject their residents to state income taxes.

What Is The Capital Gains Tax?

A capital asset is property, generally real property, such as a home or land. It can also be personal property, such as jewelry or artwork. Both businesses and individuals may own capital assets.

Tax law taxes the sale of capital assets, if a person sells a capital asset at a price greater than the price they paid for the asset. In such cases, they have realized what the law refers to as capital gain.

The amount of profit, which is the difference between the sale price and the initial purchase price, is taxed as capital gains. Capital gains are considered to be part of a person’s income, and are subject to the capital gains tax.

An example of this would be if a person purchased a piece of empty land for $100,000.00. They purchase the land hoping that future developments or the passage of time make the land more valuable so that when the person sells the land, they receive more money for the sale than what they initially paid. If after a few years, oil is found under the land; land containing oil is considered to be valuable property, and the property value rises from $100,000 to $600,000. When the owner sells the property at this higher value of $600,000, they have realized a capital gain. The amount of the capital gain equals the increased price, minus the purchase price. Or, $600,000-$100,000, so that the amount of the capital gain is $500,000.

The IRC requires that taxes are paid on capital gains. The capital gains tax rate largely depends upon whether the capital gains are long-term or short-term gains. The IRS generally considers assets that are held for one year or less before being sold to be “short-term assets.” The one-year begins on the day after the capital was purchased, and stops on the date of sale. Generally speaking, the capital gains tax rate for short-term gains would be the amount at which a person’s ordinary income is taxed. This amount is referred to as a tax bracket.

As of 2020, there are seven ordinary income tax brackets:

  • 10 percent;
  • 12 percent;
  • 22 percent;
  • 24 percent;
  • 32 percent;
  • 35 percent; and
  • 37 percent.

Taxation in the United States is considered to be progressive. What this means is that the greater the income, the higher percent at which that income is taxed. An example of this would be how the initial $9,875 of the income of someone who earns $600,000 is taxed at 10%. Once the same person has earned $40,126, the income between $40,126 and $8,2525 is taxed at 22%.

The tax rate for each additional margin, or amount of income, increases. Once a person has earned $518,400, all income above that amount is charged at 37%. A person’s highest tax percentage is their tax bracket. Short-term capital gains income is taxed at the rate of that bracket. As such, in the case of the person who has already earned $600,000, a short-term capital gain of $2,000 is taxed at the 37% rate.

Long-term capital assets are those that are held for more than one year before they are sold. The amount of capital gain on long-term capital assets is subject to capital gains tax, the long-term capital gains tax rate being one of three numbers:

  • 0%;
  • 15%; or
  • 20%.

The rate is determined by their taxable income and filing status, meaning whether they are filing as single or married. Generally speaking, long-term capital gains are taxed at a lower rate than short-term capital gains.

What Is The Federal Sale Of Residence Exception?

The federal sale of residence exemption is a federal tax scheme which prevents homeowners who sell their homes at a profit from having that profit taxed.

The IRS has put limitations on the untaxed profit gained from the sale of a home, in an effort to limit wealthy real estate investors from abusing this exemption in the tax code. In response, the federal government has limited the untaxed profit to a particular dollar amount. As of 2004, the amount exempt from taxation is $250,000 of the sale price for a single taxpayer. The amount exempt from taxation is $500,000 of the sale price for married taxpayers. Any amount which exceeds these numbers is then taxed as gross income of the taxpayer, and is taxed at the taxpayers going rate.

In order to take advantage of the federal sale of residence exemption, the taxpayer must intend to exclude their profit from the sale of their principal residence. In another attempt to limit wealthy taxpayers from abusing the tax code, the IRS has limited the tax exemption to properties that are used as the primary personal residence. In order to police this, the IRS requires that the taxpayer must have lived in and used the property for two of the last five years.

Each time that a taxpayer qualifies for this exemption they may take it. What this means is that as long as a taxpayer qualifies, they may sell a profitable home every two years and take the exemption tax free. However, it should be noted that this provision is based on the presumption that the taxpayer will take the profit earned from a sale of their home and use it to buy a new home.

Do I Need A Lawyer For Help With Federal Sale Of Residence Exemption?

If you are considering selling your home, you consult with an experienced tax lawyer. An experienced real estate attorney will be familiar with the tax code and can guide you in your sale while ensuring a tax exemption for any profit that you may gain.

In some states, such as New York, a lawyer is required on both sides of the transaction when a residence is sold. Additionally, your real estate attorney will also be able to represent you in court, as needed, should you experience any legal issues requiring representation.

star-badge.png

16 people have successfully posted their cases

Find a Lawyer