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First off, most improvements/upgrades cost more than you'll get back when you sell. The best investment is updating kitchens, which returns ~80% of the investment. Second, the cost of those improvements is deductible from the gains. Third, you've overlooked the IRS rules on capital gains InRE the primary residence:So I buy a nice little house in Alabama for $150,000, and I raise my children in it, grow old, and 35 years or so from now, get ready to retire and move down to Florida to be with the other old people. My house has kept up with inflation, which has averaged at 2.5% a year, bringing the house up to $365,000. Mind you, it's still the exact same value, just inflation has cheapened the dollar.
Yet I'm going to get taxed for $215,000 of "unearned income". Tell me, how the hell is that "unearned income"? In real terms, I didn't even make a dime. Or, if I put in the time and labor to turn my basement into another bedroom with a full bathroom plus a living room, and that boosts the value of my house another $35K, plant some nice trees and do a little landscaping that gets me another $5-7K, and then pay to put in a pool that increases the value of the house by the exact price of the pool, how the hell is that "unearned" income? I went to quite a bit of effort, time, and labor for some of that "income", and paid full price for the pool the first time around.
2011 Instructions for Schedule D (and Form 8949) (2011)Sale of Your Home
Report the sale or exchange of your main home on Form 8949 if:
- You cannot exclude all of your gain from income, or
- You received a Form 1099-S for the sale or exchange.
Any gain you cannot exclude is taxable. Generally, if you meet the two following tests, you can exclude up to $250,000 of gain. If both you and your spouse meet these tests and you file a joint return, you can exclude up to $500,000 of gain (but only one spouse needs to meet the ownership requirement in Test 1).
Test 1. During the 5-year period ending on the date you sold or exchanged your home, you owned it for 2 years or more (the ownership requirement) and lived in it as your main home for 2 years or more (the use requirement).
Test 2. You have not excluded gain on the sale or exchange of another main home during the 2-year period ending on the date of the sale or exchange of your home.
Even if you do not meet one or both of the above two tests, you still can claim an exclusion if you sold or exchanged the home because of a change in place of employment, health, or certain unforeseen circumstances. In this case, the maximum amount of gain you can exclude is reduced.
In your hypothetical case you owe nothing in capital gains tax for the sale of your main home
even if you're single and didn't purchase a home/condo/property in Florida.
If you're married you could have gotten up to $650,000 for your home (not including cost of improvements like your pool!) without paying taxes on it and if you bought a home/condo/property in Florida you could subtract the purchase price on that from the sale of your Alabama home.
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