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Capital Gains exception

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  • Capital Gains exception

    I am trying to confirm that I am understanding the post from WCI from earlier today. From what I read, one can exclude up to $500k (for a family) from capital gains if you have lived in your home for 2 of the last 5 years and this can be done once every 2 years? I must be missing something here.

    My scenario is that we just completed a $100k renovation on our house (that we have lived in for >10 years) and we financed that by selling stocks/mutual fund positions that triggered mostly long term capital gains. If I am reading this correctly, I am to believe that those capital gains taxes can be excluded and we would not need to pay those taxes for this year? I think I must be missing something here or I am misinterpreting the post. Clarification would be much appreciate.

  • #2
    The WCI post is referring to capital gains from the increase in value when selling your house, provided you’ve lived in the house 2 out of the past 5 years prior to the sale. It does not exempt you from capital gains taxes on the sale of securities.

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    • #3
      As above. It only applies to the gains in your house that you lived in when you sell it. no other application.

      Interestingly, in high COL/appreciation areas where your capital gains are likely to exceed that threshold, it provides incentive to move which partly or even completely eliminates the drag that comes from buying/selling costs.

      Option A, live in 2 million dollar house, sell it for 5 million, pay cap gains on 2.2 million (500k exception, say 300k to sell it) , at 36 (assuming california rates)% = 790k in taxes, end up with 3.9

      Option B. Live in 2 million dollar house. Sell it for 3.5. Pay cap gains on 0.8 after 200k to sell it. Buy again at 3.5 and sell at 5. Pay cap gains on 0.7 after 300k to sell.
      End up with 3.95 despite the extra 200k in selling costs.

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      • #4
        Thanks for clarifying. That makes much more sense.

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