With the right knowledge, information, and patience, you can completely avoid paying taxes on the gain from the sale of your home (or a rental property or vacation home) — stick the gain in your pocket and thumb your nose at Uncle Sam.
How It Works
Under current tax rules you are allowed to sell a principal residence once every two years and exclude up to $250,000 ($500,000 for a married couple) of the gain on the sale. It is a common misconception that the home sale exclusion is allowed only “once in a lifetime,” or only available to those of a certain age (such as the elderly), or only available if you buy a more expensive home. Those were the old rules, and they no longer apply. If you meet the two-year ownership and use tests for a principal residence, and don’t sell more than one principal residence in any two-year period, you can exclude any capital gain tax on the sale (up to the $250,000 or $500,000 limits mentioned earlier). So, to get the maximum bang for your buck, you’ll want to understand the rules and have the patience to wait out the two-year residence period.
The requirements you must meet to avoid capital gains taxes on your home sale, include:
- The capital gains tax exclusion is limited to $250,000 of the profits from the sale of your home if you file taxes as a single person and to $500,000 of the profits if you file taxes jointly.
- You must have lived in your home for at least two of the previous five years. The time that you live in the home doesn’t have to be within the past two years and doesn’t have to be altogether in one solid block, either. You can live there in two different years within the past five years and have that count. You don’t have to be living there when the house is listed for sale, either.
- If you have used your home as a rental property and want to sell it, make sure you have lived in the home yourself for two of the past five years. In other words, if you lived in it for two years and want to sell it, make sure you sell it before you have rented it for more than three years.
- Your home must be your principal residence rather than a vacation home or second home to qualify for the tax break.
- You can invest the profits in anything you want. Before 1997, IRS rules said that you had to reinvest your profits from the sale of one home into another within two years to avoid paying taxes. Since 1997, taxpayers are not required to buy another home.
- If you are married, you and your spouse cannot have used the capital gains exclusion within two years prior to your transaction.
Partial Exclusion
Even if you don’t qualify for the full capital gains tax exclusion, you may qualify for an exception to the two-year residency rule. Some examples of reasons you could be exempt from the two-year rule include an early move due to:
- A change in your employment location
- A health concern that forces you to move
- Deployment for the military or foreign service
- Divorce or separation
- “Unforeseen circumstances,” such as an act of war or terrorism, or multiple births from one pregnancy.
Medicare Tax
The Affordable Care Act of 2010 imposed an additional potential tax on the sale of real estate, but this tax impacts only high-income individuals who earn $200,000 or $250,000 for a couple. This tax, designated to supplement Medicare expenses, imposes a 3.8% tax only on the amount of profit above the exclusion for capital gains taxes.
The only sellers who must pay this tax are those who have an income above the threshold and who also sell a house with profits above the capital gains exclusion. The tax is imposed only on the difference between your profit and the excluded amount, not the full profit.
For those of you with substantially appreciated real estate in the form of investment properties or second homes, the tax savings could be worth the wait.
Tax-saving opportunities exist for married people living apart in two separate homes, for people contemplating divorce, for the elderly who may have moved into an extended-care facility for a period of time, and any number of other different combinations. Understand the rules regarding the sale of a principal residence and make those gains disappear.
Loss on the Sale of a Home
You cannot deduct a loss from the sale of your main home.
As with any tax information, your personal situation (including such things as divorce) can have major tax implications. And since IRS tax rules change often, you’ll want to be sure to consult with a qualified tax specialist.
Disclaimer: These are general guidelines and provided for information only. Other IRS rules may apply. Consult with your accountant, CPA or tax attorney for professional advice.
Consult IRS Publication 523, “Selling your Home,” or consult a tax advisor to make sure you are following the correct rules related to the individual circumstances of your home sale.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickeringto, 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235
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