Selling your home can be an exciting yet daunting experience. While you’re focused on finding your next dream home, it’s important to not overlook the tax implications of the sale. In this article, we explore the rules and capital gains exclusion associated with selling your home.
Capital Gains Exclusion
When you sell your home, the profit you make from the sale may be subject to capital gains tax. The IRS does provide exclusions that can help you reduce or even eliminate this tax burden if you are eligible through the Section 121 Exclusion, more commonly referred to as the “home sale exclusion.” This exclusion allows taxpayers who file as single to exclude up to $250,000 in profits from capital gains tax when selling their primary personal residence. Married taxpayers filing jointly can exclude up to $500,000 in gains.
How Does the Home Sale Exclusion Work?
To determine your capital gain or loss, you’ll calculate the difference between the sales price and your property’s basis, which is the purchase price plus qualifying costs. For example, if you are a married couple filing jointly and bought your primary home for $400,000 five years ago and sell it for $600,000, your gain is $200,000. Because it falls within the $500,000 exclusion for married taxpayers filing jointly, you will not owe capital gains tax on the sale. However, if you sold your home for $950,000, your gain is $550,000 and you will need to report the excess amount of $50,000 as a capital gain on your tax return. The tax rate for long-term capital gains ranges from zero to 20% based on your taxable income.
Eligibility Criteria
To qualify for the home sale exclusion, you need to meet specific criteria. The property must serve as your primary residence and you must have lived in and owned it for a minimum of two out of the last five years immediately before the sale. The two years of residency and ownership do not need to be concurrent and you do not have to be living in the home at the time of the sale. Additionally, you can only claim the exclusion once every two years and it cannot be used if you’ve claimed the gain exclusion for another home within that two year period.
Exceptions to the 2-Out-of-5-Year Rule
There are special circumstances, such as a change in workplace location, health-related moves, or unforeseeable events, that may allow you to exclude a portion of your gain even if you haven’t met the standard residency requirement. You can calculate a partial exclusion based on the time you’ve actually lived in the residence if you qualify under these special rules. If you are selling your home and have questions on how the home sale exclusion may impact the proceeds from your sale, please contact your Zuber Realty agent.