Selling your home? Find out how you can maximize the tax benefits of your home sale by calculating your basis, factoring in home improvements, and more.
Capital Gains & Tax Implications on Home Sale
Is selling your house taxable?
A home is generally the largest investment we will make in our lifetime. Most homes will be sold with a profit. This profit is referred to as a capital gain. If you are selling your main home or personal residence, you may be eligible for a special exclusion from tax of the gain from the sale.
What are capital gains and how do they work?
A capital gain is what happens when you sell an asset, something you own, for a gain. In order to determine the gain on the sale:
- Take the original purchase price and add any improvements to that – this is the basis.
- Next, subtract the basis from the sales price.
- If this is a gain,
- How long did you have the asset (referred to as holding period)?
- Long-term holding period is when you owned the item for one year and one day or longer. Long-term gains are taxed at a much lower rate than short-term assets.
- Short-term gain is when your holding period is one year or less. Short-term gain is taxed at ordinary income tax rates just like your wages or other income.
- If this is a loss, was the item a personal asset, such as your home? If so, the loss is not deductible.
What does this mean for your real estate finances?
Gain from certain sales may not be fully excludable, or excludable at all. If you are uncertain if you qualify for all of the exclusion, contact your local Tax Pro.
Are you eligible for this exclusion?
IRS code section 121 allows taxpayers an exclusion from taxes of up to $250,000 ($500,000 if married filing jointly) when they sell their home and the following tests are met:
- Ownership Test - The taxpayer must own their home for at least two of the five years previous to the sale; and,
- Use Test - The taxpayer must live in the home for at least two of the five years previous to the sale
If the amount of gain is greater than any exclusion, the excess gain (the amount over the exclusion amount) would be taxable as a capital gain.
NOTE: the two-year tests can be satisfied independently as long as the two years for each test are within the previous five years of the sale.
Example: George and his spouse bought their house in 1998 and lived in the house until 2020. They sold the house in 2019. George can satisfy the use test for the house for any two years during 2015 and 2020, but the ownership test would be any two years during 2014 and 2019.
If you didn’t own or live in the home for two of the last five years, you may still be able to use a prorated exclusion amount in certain cases (e.g., if you move for work). The excludable amount is modified when a portion of the home is used for business purposes.
Reduced exclusion and how to qualify
If you lived in and owned your home for less than the required two years for each test, you may still qualify for a partial exclusion. Taxpayers who had a:
- Work-related move due to a job transfer or a new job
- Health-related move
- Natural disaster or another unforeseen casualty
- Other issues that may have affected your ability to stay in the home
How to file your taxes when you have made a home sale
When you file your taxes the year you sell your house you may have to claim the gain and exclusion on your tax return if you had a gain and:
- Your gain was greater than $250,000 ($500,000 if filing jointly)
- You were issued a Form 1099-S – the gain won’t be taxable, but you will have to reconcile the gain on the tax return by putting in the sale on the first line and adding another line for the allowed loss on Form 8949, Sales and Other Dispositions of Capital Assets.
- You claimed depreciation on your home while you owned it because you had a home office or rented all or part of the home.
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