re: I believe this rule is from the Clinton era and has not been changed — the first $500,000 of your profit from selling your own home is TAX FREE. Anything above that is taxable.
I don’t think that is correct. It has to be far less. The fact that people who short-sale their homes or whose homes are foreclosed on are still hit with taxes on the non-existent “profit” they make tells me otherwise.
500,000 tax free for married filers, thought there may be a 3.8% Obamacare tax.
the taxes paid on short selling a home is from “loan forgiveness” taxable at the income rate.
the taxes paid on a profitable sale is cap gains which there is a nice exclusion.
let’s say you are my employee and you make 100k. I say how about I loan you the money instead and then forgive the 100k to avoid you paying income tax. Bad idea. You still owe the tax.
ditto for short sale, I loan you the money for a house, you short sale the house, I forgive the loan portion the short sale did not cover, You still owe the tax on that portion of loan forgiveness.
Now, you buy a house for 500k, it appreciates to 1,000k, I loan you 1000k, the house drops in value, you sell for 750k on a short sale, I forgive the 250k in lost value.
You owe income tax on the 250k in loan forgiveness, but you pay zero capital gains on the difference in sale price of 750 minus 500k.
The $500,000 gain is not subject to tax if certain conditions are met: the homeowners must have lived in the home for at least two of the past five years. If the homeowner is single, the amount of non-taxed gain allowed is $250,000.
Other factors can affect the amount owed. For example, if the house had been rented and depreciated the difference between the basis and the gain will be larger and possibly taxed. Even if it hadn’t been depreciated while it was rented the IRS will take depreciation. That’s a nasty surprise for some folks.
Re the short-sales getting taxed on what you call the “non-existent” profit, that’s easily explained. The profit is real. The owners kept re-financing and taking cash out as property values went up. The money they sucked out with mortgages was real money. They spent it.