American Tax Service

Helping Americans File Their Taxes


Capital Gains and Your Home Sale

Capital gains on home and real estateDid you know that one of your best tax breaks available might be selling your home?

Homeowners are already aware that there are numerous tax breaks available during tax season, such as mortgage interest and property tax deductions. However, what many do not know is that a large portion of homeowners who sell their homes are able to do so without paying the IRS a penny.

Capital Gains on Home Sale

Selling your primary home can make up to $250,000 in profit or double that if you are married, and you won’t owe anything for capital gains.

The only time you are going to have new tax obligations are if you make a huge gain.

Many sellers are surprised that this is true, especially if they have been living in their home for years. This is because before 1997, the only way you could avoid paying taxes on the profits from a home sell was to use it to purchase an even more expensive house within two years. Taxpayers over 55 had another options, they could take a once in a lifetime tax exemption of up to $125,000 in profits.

This required Form 2119 to be filed too. Thankfully, in 1997, the Taxpayers Relief Act was introduced and millions of residential taxpayers had the burden lifted. The lifetime option was replaced with the current sale of home exclusion amounts. This change makes it easier for homeowners to get rid of their current residence if they want to.

Requirements Have to Be Met

If you used the rules before 1997, it does not mean that you are disqualified from claiming the exclusion on any sales now.

You also don’t have to worry about using your proceeds to purchase another home either. The best part is there is no limit on the number of times the home sale exemption can be used. Usually, you can keep those tax-free profits each time you sell one of your homes.

The bad news is “most cases”, which means there are some requirements that have to be met for you to live the good life after selling your home.

1. The property has to be your principal residence (you live in it). If it is an investment property, you will have to follow the normal capital gains rules.
2. You have to live in the residence for two of five years before selling it. (This is also a sneaky way of saying you can only sell a home once every two years at the minimum).

The good news is, if your gain does not exceed the limit, you don’t have to file anything with the IRS.

Second Home Sales Get a Tax Hit

If you own multiple homes, it may not be as easy to shelter sale profits as it was in the past.

The Housing Assistance Act of 2008 was designed to provide relief for homeowners who were on the edge of foreclosure yet it could cost the owners when they do decide to sell.

You used to could move into the second property, make it your primary residence, live there for two years and profit the gains.

Now, even when your second piece of real estate is converted into your primary home, you will be taxed on part of the gains based on how long the home was used as a second home and not a main residence.

Rules for Married Couples

Married couples are able to profit more with the rule; however, their sales may not always be tax-free.

Either spouse can meet the ownership test. For example, its okay if you owned the home for two years, but only added your husband when you were married six months ago. You will pass the ownership test with flying colors.

However, when it comes to the “use test” both partners have to pass. The good news is if you were unwed and living together for a period that equals two years, the IRS will allow you to pass. Nevertheless, if that isn’t the case you won’t get the tax exclusion unless you wait until he meets the two year mark too.

Keep in mind, the two-year eligibility rule when getting to know your spouse. Remember, you are only able to sell a home once every two years. Therefore, if your new spouse sold a home in the past two years, it will prohibit you from being able to sell until their two-year time span expires.

Determining the Sale of Home Exclusion Amount

Now, once you decide you are eligible to sell and meet the exclusion rule you have to do some math so you avoid pulling out your checkbook after you sell. First, keep in mind you have to think about more than the money that you received during the sale. It is important, but other numbers play a factor too.

You have to consider your gain. It is what decides whether you will have a tax bill. You could sell your home for $750,000 and not owe any money because you didn’t gain more than $250,000 ($500,000).

1. To get to your gain amount, establish your basis in the home. (Usually this is what you paid for the residence and the capital improvements that you made)
2. Compare the basis amount to what you received from the sale (excluding commissions and other expenses). This number provides you with the gain on the sale.

Usually, you will find that you got some profit, but it isn’t large enough for you to have to pay taxes on it.

Keep in mind that improvements increase your basis, so a smaller portion of the selling price is considered a gain. The American Relief Act is 20% for higher income taxpayers and 15% for many individuals and 0% for some sellers.

Partial Exclusion is Still Good

Even if you are unable to meet all of the tests, it does not mean that you will not get any sort of tax break at all.

If you are selling because of special conditions, you are eligible for a prorated tax-free gain. In this case, you would calculate the fractional amount of time that the two-year use test was met.

Special Rules – Special Circumstances

Military members also have special home sell considerations. Thanks to redeployments, soldiers can find it hard to meet the residency rule and end up paying taxes when they sell. However, in 2003, it was put into law that military personnel are exempt from the two-year use requirement for up to 10 years, allowing them to qualify for the full exclusion when they have to move to fulfil their duties.

In 2008, a new rule was put into place for those who sell after a spouse dies. Instead, of having to sell during the same year the spouse passes, a widow/er can take up to two years to sell and have up to $500,000 excluded from taxes.

Therefore, if you want to sell your home, just consider what we have discussed today. You may find out that you won’t have to pay Uncle Sam a dime when you sell your home.

Video – How To Sell Your Home Without A Capital Gains Tax

Discover the Benefits of Filing Your Taxes Online

Keep in mind, if you file online with TurboTax they will ask you the correct questions to let you know which capital gains deductions you qualify for and guarantee you will receive the largest refund ever.

Their online filing services have the ability to import your W2 information into your tax return so you can avoid worrying about your forms being delivered via snail mail. You can also use their free tax refund estimator to see how much of a refund you can expect.


Capital Gains and Your Home Sale
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