Will You Have to Pay Capital Gains Tax When You Sell Your Home?
What is Capital Gains Tax?
Short Term | Long Term |
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If I did not sell the item for a profit, but actually lost money on my investment, can it be deducted from my taxes?
For short- and long-term ownership, how is a year calculated?
To figure out if an item has been owned for a year, the person starts counting on the first full day of ownership until the day the item was no longer theirs. For instance, if a home was purchased on January 1st ownership is not counted until January 2nd. (IRS Topic No. 409, Capital Gains and Losses)
How do I know if there will be a gain on the house I am selling?
When a home is sold, the “gain” is the home’s selling price minus deductible closing costs, selling costs, and the basis.
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What the home sold for - The basis - Deductible closing costs - Selling costs - Qualified Exclusion = What is owed |
For example: Alex and Chris have owned and lived in their home for 10 years. They recently sold the home for $870,000. They purchased the home for $250,000 and had $50,000 in home improvements, these items are the basis. Their closing costs were $6,000 and their real estate agent received a commission of $50,000. In addition, they qualify for a $500,000 exclusion as a married couple. They will owe capital gains tax on the $14,000 of remaining profit.
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Home sold for: $870,000 Basis of the home: - $300,000 Closing costs: - $6,000 Selling costs: - $50,000 Exclusion - $500,000 Capital Gains Owed: $14,000 |
Can home improvements increase my basis?
Yes. Basis in the home is a total of documented improvements to the home and the amount the owner paid for the home. Documented improvements made to the home may include:
- upgrading windows,
- remodeling a kitchen or bathroom,
- room additions,
- changing flooring,
- and landscaping.
Replacing items that have worn out or are no longer in working order do not count as improvements. For instance, buying a new air conditioner after the other stopped working, replacing worn carpet, installing a new water heater.
What is the $250,000/$500,00 capital gains exclusion?
A capital gains tax exclusion is available for home sellers that meet the federal requirements (see below). This exclusion allows for a single home seller to subtract $250,000 from the amount the home was sold for and those filing jointly or recently widowed to subtract $500,000. (IRS Topic No. 701, Sale of Your Home)
Who qualifies for a $250,000/500,000 exclusion after a home is sold?
The Internal Revenue Service has strict rules over who is and who is not entitled to the capital gains exclusion. To qualify:
- The person must have owned the home for at least 2 years.
- It must have been the owner’s principal residence for 2 years out of the 5 years prior to the sale.
- During the 2-year period ending on the date of the sale, they did not sell another home and use the capital gains exclusion.
Homeowners may use the capital gains exclusion more than once if they meet the requirements.
For widows seeking a full exclusion, they must:
- Sell the home within 2 years of the spouse’s death,
- Have not remarried,
- Have not taken an exclusion on another home sold less than 2 years before the sale of the current home, and
- Either the seller or the deceased lived in the home for at least 2 out of the 5 years prior to sale.
Why may I not qualify for an exclusion?
Things that may prevent a person from using the exclusion are:
- The house is not the owner’s main home or residence.
- The property was owned for less than 2 years before selling it.
- The owner did not live in the home for at least 2 years out of the 5 year period before the property sold.
- The owner already claimed the exclusion on another house in the past 2 years before selling this house.
- The owner bought the home through a like-kind exchange.
- The owner is subject to expatriate tax. This happens when a U.S. citizen’s main residence is not in the United States or who has renounced U.S. citizenship).
Homeowners who do not meet the criteria will have to pay capital gains tax on the entire gain they get from selling their property.
I am being deployed, are there exceptions made to the exclusion rules?
For active-duty military and spouses, the Foreign Service, or the U.S. Intelligence Services, capital gains exclusion may apply under certain circumstances. An exclusion may still be used the government either:
- Transfers the person/spouse to a duty station more than 50 miles from the home, or
- Require the person/spouse to live in government housing. (IRS Topic No. 701, Sale of Your Home)
Is it possible to get a partial exclusion if I have not lived in the home for 2 years?
Maybe. There are some cases that allow a person to Exceptions may also apply for those with documented unforeseen event (circumstance). An unforeseen circumstance would be: if your doctor ordered you to move for health reasons, your employer required you to move to another location, or if you have had a significant change in your life due to unforeseen circumstanes, you may still qualify for a partial exclusion of capital gains tax.
For example, you live in a 900 square foot townhouse, and you recently gave birth to triplets. An unforeseen circumstances exception may apply. The exception would allow you to sell your townhouse and move to a larger home even if you owned the townhouse for less than 2 years. Similarly, a car accident that causes a severe disability or being forced to sell a house in divorce may be an exception. IRS Publication 523 will provide detailed information on possible exceptions.
