Question:

If a house is bought for $240,000 and 6 years later is sold for $280,000,will taxes be taken from the $40,000?

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Do not know anything about buying and selling houses, but was curious since watching "House Hunters" on tv. How can you make a profit if taxes and interest on a house comes out more than what you agreed on paying for the house. How can you pocket $40,000 on the above scenerio ? How can you sell a home and buy another one before paying off the first one ? Please excuse my ignorance. Thank you

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  1. Capital gains are just that gains.  You subtract the basis and the cost of the sale from the sales price.  The basis is what you paid for the house.  The cost of the sale is the real estate commission and the seller's closing costs.  The remaining amount is a capital gain or a capital loss.

    In real estate, for years, they allowed you to defer the capital gain if you put the money back into another house within a certain amount of time.  10 years ago, they changed those laws.  Now, if you have used this home as a primary residence for 2 of the last 5 years you are eligible to exclude a large amount of money from the capital gain, up to $250,000 for single filers and up to $500,000 for a couple filing jointly.  Even if your calculated gain was $40,000 you wouldn't pay a penny in taxes on it (if you lived in it for 2 out of the last 5 years).  

    All $40,000 is in your pocket, tax free.

    Now, let's say this was an investment property and it didn't qualify for the capital gain exclusion.  You didn't live in the property for 2 of the last five years, but rented it out...  Many  people take depreciation on rental units and that would lower the basis cost and make the capital gain higher.  There are also two types of capital gains, short-term and long-term.  If you held the asset less than 12 months, it is a short term capital gain and the money is taxed at ordinary income tax rates.  If it is a long term capital gain, then it is taxed at 15%.  

    In reality, if you bought a house for $240,000 and didn't have an interest only mortgage, you would owe the bank something less than $240,000 (probably on the order of $225,000).  They sell the house for $280,000, and have to satisfy all liens in order to do this.  The $225,000 must go to the bank to pay of the mortgage to release the lien.  So now the seller also pays the 6% to the real estate agent ($16,800) so the seller gets something like $38,200 that they are going to put into the new house.  

    Usually house closings are scheduled so that you don't own two houses.  Some people can qualify for the second mortgage without settling their first.  Some people use a bridge loan, where the old house is under contract, but they have to close on the new one before they can move out...  It can get interesting...

    good luck!


  2. Here is what I came up with. Maybe it will help to answer your question?

    http://moneygirl.quickanddirtytips.com/m...

    http://www.south-county.org/Gilroy/RealE...

  3. Yes, that's a capital gains tax.  If you don't put the money back into a primary residence befor the year end, you may be exempt.

  4. When you sell a house, your mortgage is paid off, to clear off that lien from title.  When you sell, a 1099 is issued to seller and to IRS and you have to report your gain on the house.  BUT you get to add in the costs of purchase and sale before determining profit, and capital improvements too.  The gain is capital gains and is taxed at a lower rate than ordinary income, and can be avoided if it was your primary residence those 6 years by following IRS regs.

  5. If you lived in this house, no, there are no taxes.

    If it was a rental then yes, you owe capital gains.

  6. There is a 250,000 exemption for the sale of a primary residence you have lived in for 2 years.  You will get a 1099 at closing, but you owe no taxes.

  7. I think "Capital Gains" only applies to a certain amount, that is MORE than what you are talking about, but I could be wrong, so ask a RE Professional in your area. Also, you might contact a Tax Attorney for help as well.

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