Selling a self-built dwelling may trigger capital gains tax liability.
### Understanding Capital Gains Tax on Self-Build Homes
For those embarking on the exciting journey of self-building a home, it's essential to understand the potential tax implications when it comes time to sell. HMRC's Capital Gains Tax (CGT) manual provides a useful starting point for navigating the circumstances in which CGT might be payable.
Ben Taylor, a member of Roythornes' real estate tax and private and corporate tax teams, emphasizes the importance of seeking advice if you are uncertain about a future sale of a self-build property.
#### Conditions for CGT on Selling a Self-Build Home
To qualify for the main CGT exclusion, you must have owned and lived in the home as your primary residence for at least two of the last five years prior to the sale. Capital gains are calculated by subtracting selling expenses and the adjusted cost basis from the sale price. The adjusted cost basis includes the purchase price plus improvements (such as construction costs for a self-build), minus any depreciation if applicable.
#### Key Exceptions and Exclusions
Individuals can exclude up to $250,000 in capital gains from taxable income when selling their primary residence, as long as the ownership and use conditions are met. For a self-build home, the costs incurred in building the home count as improvements and can increase the adjusted cost basis, thereby reducing capital gains. Expenses related to the sale, such as real estate commissions and closing costs, are deductible from the sale price when calculating gains.
Losses on the sale of a personal residence, including a self-build home, are not tax deductible. It's also worth noting that the $250,000/$500,000 exclusion can be claimed once every two years.
#### Summary of Capital Gains Tax Treatment for a Self-Build Home Sale
| Condition/Exception | Details | |---------------------------------|----------------------------------------------------------------------------------------------| | Ownership and residence period | Must have owned and lived in the home at least 2 of last 5 years | | Adjusted cost basis | Purchase price + building costs/improvements – depreciation | | Exclusion amount | Up to $250,000 (single) or $500,000 (married filing jointly) | | Deductible selling expenses | Real estate agent fees, closing costs | | Losses on personal residence | Not deductible | | Exclusion frequency | Can be used once every 2 years | | Tax rate | Long-term capital gains rates apply if held >1 year (0%, 15%, or 20%) |
If capital gains tax is payable on the sale or disposal of a self-build home, you can work out your gain via HMRC services. However, being aware of the potential tax implications can help you avoid costly surprises. If you engage in serial self-building, your activity may meet the 'badges of trade' and be taxed as income rather than capital.
For comprehensive advice on the tax implications of selling a self-build home, it's always worth speaking to a professional adviser like Ben Taylor, who specializes in lifetime estate and business succession planning, capital taxes (IHT and CGT), transactional tax matters, including SDLT and VAT.
- For individuals who are planning to build their own home, understanding the potential capital gains tax implications when selling is crucial, as costs incurred during the construction process can increase the adjusted cost basis and reduce capital gains.
- If you are unsure about the tax implications of selling a self-build property, seeking advice from a professional, such as Ben Taylor who specializes in real estate tax and personal-finance matters, is highly recommended.
- While losses on the sale of a personal residence, including a self-build home, are not tax deductible, it's worth noting that you can exclude up to $250,000 ($500,000 for married couples filing jointly) in capital gains from taxable income when selling your primary residence, as long as the ownership and use conditions are met.
