Home Sale: Will You Pay a Capital Gains Tax?

If you sell an asset such as a stock or a property and make a profit (AKA a capital gain) you are subject to a capital gains tax on the net profit. Luckily, in the case of the sale of your main home, you may qualify to exclude a relatively large capital gain. The exclusion amount is $250,000 for a single person and $500,000 for a couple who file a joint return.

Exclusion Eligibility Requirements: Generally, to qualify for the exclusion amounts, you must satisfy the ownership and residence tests. To satisfy those tests you must have owned and resided in the home as your main home for 2 of the last 5 years leading up to the date of the sale. The 2 years of residence in that main home does not have to be a single block of time. There are some special exceptions for surviving spouses, divorces, certain types of federal government service, and life changing circumstances.

Calculating Net Profit: The tax applies to your net profit. You can subtract the cost of purchasing the homes, sales expenses, and the cost of major home improvements from the home sales price. Maintenance does not count as home improvements. A net loss is not tax deductible.

Existing Tax Policy: Current tax policy does not require you to use the profits to buy another main home.

Capital Gains Tax Rates: If you make a profit above the exclusion amount you are taxed at capital gains tax rates. These rates are usually more favorable than your ordinary income tax rates which are applied to things like wages. Current capital gains rates 0%, 15%, or 20%. The rate applied depends on your income bracket.

Find out full details in the IRS Publication 523 “Selling Your Home” available online at  https://www.irs.gov/forms-pubs/about-publication-523


Posted: April 1, 2024

Category: Money Matters, Work & Life

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