Loading the player...
A:

It is true in most cases. When you sell your home, the capital gains on the sale are exempt from capital gains tax. Based on the Taxpayer Relief Act of 1997, if you are single, you will pay no capital gains tax on the first $250,000 you make when you sell your home. Married couples enjoy a $500,000 exemption. There are, however, some restrictions on this exemption.

In order for the sale to be exempt, the home must be considered a primary residency based on Internal Revenue Service (IRS) rules. These rules state that you must have occupied the residence for at least two of the last five years. If you buy a home and a dramatic rise in value causes you to sell it a year later, you would be required to pay capital gains tax on the gain. This rule does, however, allow you to convert a rental property into a primary residence because the two-year residency requirement does not need to be fulfilled in consecutive years. For example, suppose that you invest in a new condo. You live in it for the first year, rent the home for the next three years and, when the tenants move out, you move back in for another year. At the end of this five-year period, you will be able to sell your condo without having to pay capital gains tax.

The other major restriction is that you can only benefit from this exemption once every two years. Therefore, if you have two homes and lived in both for at least two of the last five years, you won't be able to sell both of them tax free.

This act has been beneficial for home owners because it has significantly changed the implications of home sales. Before the act, sellers had to roll the full value of a home sale into another home within two years in order to avoid paying capital gains tax. This, however, is no longer the case, and the proceeds of the sale can be used in any way the seller sees fit.

For more information on useful personal tax tips, check out Tax Tips For The Individual Investor and A Long-Term Mindset Meets Dreaded Capital Gains Tax.

RELATED FAQS
  1. Do we pay capital gains taxes on the profit if we sell the house?

    We have lived in our house in Washington state for 4.5 years, but we have only owned it for 1 year. ... Read Answer >>
  2. Is there a capital gains tax on the sale of our home if we use the profit towards ...

    Since my job reduced my hours and uncertainty of income, we might have to sell our home. We would like to put the profit ... Read Answer >>
  3. Do I have to pay capital gains tax when I sell my home?

    My husband and I were divorced in 2011. We owned our house jointly and he lived there after the divorce until his death in ... Read Answer >>
  4. I sold my house. Can I exclude the gain from my income?

    Generally, you are required to include the gain from the sale of your home in your taxable income. However, if the gain is ... Read Answer >>
  5. Are capital gains taxed differently in different countries?

    Learn about capital gains taxes in the Unites States as well as those of other countries, where these tax rates vary significantly. Read Answer >>
Related Articles
  1. Taxes

    Is It True That You Can Sell Your Home And Not Pay Capital Gains Tax?

    Based on the Taxpayer Relief Act of 1997, if you are single, the first $250,000 you make on your home sale is not subject to capital gains tax.
  2. Taxes

    Capital Gains Tax 101

    Find out how taxes are applied to your investment returns and how you can reduce your tax burden.
  3. Taxes

    Tax Breaks For Second-Home Owners

    Owning a second home is a great investment for a variety of reasons, but you need to know the tax implications of multi-home ownership.
  4. Wealth Management

    Buying a House Before Selling Your Own: Risks and Considerations

    Learn more about the financial risks and worst case scenarios associated with buying a home before selling your current residence.
  5. Taxes

    Taxable Events You Didn't Know You Were Creating

    Understanding the implications of these events can help you plan your finances and, in some cases, save you from paying taxes altogether.
  6. Home & Auto

    To Rent Or Buy? The Financial Issues

    Thinking of buying a home? We look at the initial and ongoing costs, as well as the so-called benefits.
  7. Budgeting

    7 Smart Steps Every New Homeowner Should Take

    Don't let the excitement of owning your own home lead you to make bad financial decisions.
  8. Investing

    Understanding Capital Gains

    Capital gain refers to the increase in value of a capital asset or an investment security upon sale. In other words, if you buy company stock, real estate or fine art and then sell it for more ...
  9. Taxes

    Comparing Long-Term vs. Short-Term Capital Gain Tax Rates

    Learn about the difference between short- and long-term capital gains and how the duration of your investment can impact your tax liability.
  10. What Would Moving Cost?

    If you’re faced with an expensive remodel, moving might seem cheaper, but you’d be surprised how expensive it can be to sell one home, buy another and move all your possessions. Moving ...
RELATED TERMS
  1. Main Home

    A term used by the Internal Revenue Service (IRS) to define the ...
  2. IRS Publication 523

    A document published by the Internal Revenue Service (IRS) that ...
  3. Deferred Gain On Sale Of Home

    An obsolete tax law that applied to homeowners before May 7, ...
  4. Exemption

    A deduction allowed by law to reduce the amount of income that ...
  5. Long-Term Capital Gain Or Loss

    A gain or loss from a qualifying investment owned for longer ...
  6. American Taxpayer Relief Act Of 2012

    A U.S. bill signed by President Obama on January 2, 2013, that ...
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center