Though tax time is no one’s favorite time of year, knowing how your tax situation is affected by certain events – like the sale of your home – is of no small importance. If you want to sell your home or are in the process of doing so, there are specific tax implications to consider. Here’s what you should know.
Will I have to pay taxes if I sell my home?
If you sell your home for more money than you bought it, you may owe taxes on the amount between those two numbers. The IRS does have some favorable rules, however, that could help you qualify for an “exclusion of gain”.
Whether you have a capital gain or capital loss (essentially, whether you gained money or lost money on the sale of your home) is determined by subtracting the amount you paid for your home from the amount you sold it for.
If the number is positive, it is called a capital gain. If it is negative, it is a capital loss.
What is “Exclusion of gain”?
Exclusion of gain is an “exclusion from being required” to pay taxes on the sale of your home. There are eligibility requirements for this that have to do with how you file your taxes (single vs. married), how much money you made on the sale (your capital gains), as well as how long you’ve owned and lived in your home.
The IRS offers an exclusion of gain of $250,000 for single filers and $500,000 for married couples who file jointly, if certain requirements are met.
The exclusion works like this:
Let’s pretend bought a home 15 years ago for $150,000 and sold it today for $700,000. This means your profit is $550,000. (Congratulations!)
If you are married and able to file taxes as “married filing jointly,” you may not have to pay taxes for $500,000 of that profit.
If you are only able to file taxes as “single,” then the amount that is not taxable may only be $250,000. You may owe capital gains tax on the other $300,000.
How to qualify for the exclusion of gain
The following eligibility requirements must be met to qualify for the exclusion of gain:
- You need to have owned the home for at least two out of five years before the closing date.
- You need to have resided in the home as your primary residence for two out of five years before the closing date. (does not have to be consecutive)
- You need to have not sold a home in the previous two years from the closing date. If you have sold in the previous two years and did not take an exclusion of gain for that sale, then you can still qualify.
There are some exceptions to the requirements above if you’ve lived in your home for at least a year and experienced a life-altering event that triggered the sale of your home. You could be eligible for a full or partial exclusion of gain for events such as divorce, becoming widowed, becoming ill or disabled/incapacitated, if your former home was destroyed, or if you were a service member.
Disqualifications for the exclusion of gain
There are specific things that can disqualify you from the exclusion of gain, such as having to pay expatriate tax, or if you acquired your home in a like-kind exchange in the previous five years. Additionally, the home must be the primary residence you’ve lived in for at least two years. So if this is your vacation home or you sell before owning it for two years, it’s likely you will not qualify.
If you’re selling your home, you may not have to pay capital gains tax depending on your situation. However, it’s important to note the limitations and qualifications so you know what you’re in for come tax time.