Will You Owe Capital Gains When You Sell Your Home?
Homeowners getting ready to sell their home will be pleased to know that, in many cases, they will not owe capital gains taxes. If they do, there are large exemptions, as long as the home is their primary home. The following information explores when capital gains tax may be owed when selling a home.
The Ownership and Use Test
In order for homeowners to qualify for a capital gains tax exemption, the home must pass what's known as an ownership and use test. First, the home must be owned at least two years and must be considered a primary home. To qualify as a primary home, the owner must have lived in it for at least two of the past five years.
The two years don't need to be consecutive, however. Someone can purchase a home, live in it for a year, rent it out for three years, then live in it one more. That would add up to two of the past five years, qualifying it for the exclusion.
A home that was purchased as an investment and rental property can be converted to a primary residence and still qualify. It will just take time living in the home to convert it to a primary residence that is exempt from capital gains taxes up to the legal limit.
Is There a Limit on the Exclusion?
Home sellers can exclude up to $250,000 in capital gains if filing as an individual. Married couples who file jointly can exclude up to $500,000 in capital gains.
It's also worth remembering that capital gains tax is only owed on the profit when a home is sold. If the home was originally purchased for $250,000 and sells for $480,000, only $230,000 of the selling price is considered a capital gain.
How Often Can a Seller Qualify for an Exemption?
This exemption can only be taken every two years. If someone owns multiple homes and sells one, taking the exemption, they will have to wait to have any capital gains excluded from taxes again.
Ways to Lower Capital Gains
If a home seller discovers they will owe capital gains tax on profits from the sale of their home, there are still ways to ensure that those taken are as little as possible.
First, the costs of any improvements made to the home can be deducted from the profits from the sale of the home. These improvements can include kitchen remodeling, new carpet, new paint, landscaping, and other costs. Homeowners should always keep receipts when paying for improvements, as these can save money later.
Some people also find they are able to avoid capital gains taxes by rolling any profits into the purchase of a similar asset within 180 days of selling the home. The rules governing this sort of exemption can be complicated, however.
Whenever a homeowner is considering selling a home, some familiarity with the potential tax implications is good to have. This way, they can ensure they are making the choice that fits their goals best and ideally keeps their tax liability low. Researching options and exemptions in advance allows sellers to avoid surprise costs and keep more of the profits of the sale in their pockets.