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What is the Capital Gains Exclusion?
The capital gains exclusion is an IRS tax provision that allows you to exclude a certain amount of your capital gains from your taxable income. For example, if you have a capital gain of $10,000, you can exclude $3,000 of it from your taxable income.
Capital gain on a home sale is the difference between the selling price of your home and the original purchase price, plus any improvements you made to the home. The capital gains tax on your home can have a big effect on how much profit you ultimately bring in from selling your home and/or property.
There are some instances where you may not meet all the tests, but you may be eligible for a partial tax break. If you sell your home due to special or unforeseen circumstances, your tax preparer can talk to you about a capital gains partial exclusion for a home sale. These instances would be such as unemployment or a change in your health.
This figure is calculated as a fraction of the time that you would have met the two-year test. Let’s say you lost your job and sold your home after only being in it a year and three months.
You’ve lived in the residence for 15 of 24 months, or 15/24, or 0.625 months. For a single person, multiply the full exclusion amount of $250,000 by 0.625, and you’d be eligible to claim a capital gains exclusion up to $156,250.
Additional Rules for Special Circumstances
There have been a few changes in regards to special circumstances as well. These changes allow for military personnel and surviving spouses.
Military Personnel Special Circumstances Changes
In 2003, the law changed to allow for special considerations for military personnel. They are often redeployed, and it makes it next to impossible to meet the residency requirement. These soldiers then owe taxes when they sell their homes.
Under the new law, military personnel have up to 10 years to sell their home, allowing for the full exclusion. This is applicable if they have to move due to service commitments.
Surviving Spouse Special Circumstances Changes
In 2008, another law was passed regarding the death of a spouse. If the surviving spouse sells their home, it falls under a special consideration.
A previous law stated that a widow or widower had to sell their home the same year their spouse died. Under the new law, the surviving spouse now has up to two years to sell their home. They would be excluded up to $500,000 in gains on the home sale.
How to Claim a Capital Gains Partial Exclusion on Your Home Sale
Keep in mind, if you file online, they will ask you the correct questions to let you know how to claim 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.
Summing It All Up
The bottom line is that you can sell your home and still be eligible for the exclusion of gains. You’ll not always benefit from a full capital gains home exclusion so that partial exclusion may be an option. Obviously, timing is of the essence when selling your home, so before you do so, lay all your cards out on the table for your tax preparer.