Understanding the Home Sale Tax Exclusion
You've thought long and hard about it and have decided: It's time. You're going to sell your house. And while this is an exciting time, it also comes with a whole host of questions. Should I use an agent? How much should I list it for? What do I do with the cash after the sale?
All of these are important. But one thing you cannot ignore is this: Do you have to pay capital gains tax on the proceeds of your home sale?
The answer is that you do unless you have the Home Sale Tax Exclusion.
This important exclusion helps most homeowners avoid the burden of a heavy tax on the sale of their homes during a move. Let's review the requirements and see how a person qualifies for the Home Sale Tax Exclusion.
Qualification for the Exclusion
To qualify for this huge tax break, homeowners must do a couple things. First, they must own the home. This may seem like a silly distinction, but the seller must have legal ownership of the property without any sort of strange situation that could interfere with that person’s ability to sell. Second, they must have used the home for two years as their primary residence. This two-year period is the minimum time that the homeowner must have lived at the property in five years, giving flexibility to those who have moved away temporarily.1
This allows home rentals. If a person lived in a home for a year, moved somewhere else, rented the home for another year, and moved back for the final year of that person’s ownership before selling, he or she would still qualify.
Another key component of this exclusion is total profit. Exclusion can only be applied up to $250,000 for a single individual. This can be extended to $500,000 for married couples that file their taxes jointly. Note that this is profit, not total value. A person can sell a home for $800,000 and still qualify if he or she originally paid $600,000 for the house.
Last, this exclusion is only available every two years. This means that, if you sell a home, move to a new house, then decide after a year that you don't like it and sell it immediately, you may not get this exclusion.
Not Qualifying for the Exclusion
If one of the rules for this exclusion isn't met, the seller does not qualify for this tax break. He or she will be required to pay a capital gains tax on the profit of the sale of the property. But how much?
Capital gains are based on income, with most Americans paying a maximum of 15%. Those making over $445,850 will pay higher amounts. Even at 15%, this tax can take a big chunk of people’s profit from their home sale. Making decisions that keep one in line with the exclusion can save thousands when it is time to sign contracts and transfer ownership.2
A Valuable Perk for Homeowners
This exclusion helps most homeowners avoid paying high taxes on selling their only home and moving to a new one. If you’re considering selling your home and aren't sure if you might have to pay, reviewing the requirements to see if you qualify can take a big weight off your shoulders.