Knowing The Exclusions For Capital Gains Tax On Real Estate Sales Can Help You Walk Away With More Profit In Your Pocket
What & How Much Is Capital Gains Tax On The Sale Of A Home?
Sometimes, the IRS levies a capital gains tax on the sale of a home. Being able to sell your home without paying taxes is relatively easy for most people, though, since tax on real estate only applies under specific conditions. You’ll pay capital gains tax on selling a home if:
- The property is not your primary residence.
- You have lived in the home for less than two years (and you do not meet any of the special conditions for exemption from the two-year rule listed below).
- The net profit you make from the sale of your home minus the cost basis is more than $250,000 (for single people) or $500,000 for couples jointly filing taxes (the capital gains tax will only apply to the amount over $250,000 or $500,000).*
*The cost basis includes the cost of any improvements you made to the property that had a useful life of more than one year (like a new roof), plus the cost of selling the property (like closing costs and real estate agent commissions).
In these cases, the amount of tax on real estate sales is calculated based on your income and how long you have owned the home.
How To Sell A House And Not Pay Taxes
Homeowners selling their primary residence are exempt from paying capital gains tax on the sale of the home for the first $250,000 ($500,000 if married). This rule applies as long as the home you sell is your primary residence, and you’ve lived in it for at least two of the last five years (you cannot claim an exemption from paying capital gains tax on real estate sales more than once within two years).
Given that most sellers remain in the same home for ten years before deciding to move, and that the median sale price for residential property is currently around $243,225, it’s safe to say that many people will be fully exempt from paying capital gains tax on the sale of their home.
Special Circumstances That Let You Sell A House And Not Pay Taxes Even If You Don’t Meet The Two-Year Rule
- If you were granted ownership of the property in a divorce settlement, you can apply the time that your ex-spouse lived in the home to qualify for the two-year rule.
- If your spouse died and you haven’t remarried by the time the house sells, you can apply the time your spouse lived in the home to qualify for the two-year rule.
- For members of the armed services, you can have the two-year rule suspended for up to ten years during any period you or your spouse is serving “qualified extended official duty.” That is, if you or your spouse is assigned to a duty station at least 50 miles from your property or you are compelled to reside in government housing under government orders.
Other Exemptions To Capital Gains Tax On Real Estate Sales You Can Qualify For If You Don’t Meet The Two-Year Rule
Even if you cannot qualify for the full exemption under the two-year rule, you can seek a reduced exemption from paying capital gains tax on the sale of a home. A reduced exemption may be available if you are moving so soon because of:
- A loss or change of employment.
- A significant change in your health status.
- Other unexpected circumstances, like multiple births from a single pregnancy.
Are you trying to sell your house as-is? Click here to learn the best tips on selling your house as-is.
