The majority of people who sell their primary residence, in which they have lived for at least 2 of the last 5 years, do not pay a capital gains tax on the sale. In addition to the $250,000 exclusion from capital gains per person (or possibly $500,000 for a couple), you can also subtract your full cost basis in the property from the sales price. Your cost basis is calculated by starting with the original purchase price you paid, and then adding the expenses you paid to make the purchase (e.g. attorney fees, the cost of title insurance, and any settlement fees). To this figure, you can add the cost of any additions and improvements that had a useful life of over 1 year, made while you owned the property. And then finally, you add your selling costs, such as the fees paid to a real estate broker and your attorney, as well as any transfer taxes that you may have to pay.
By the time you finish totaling all the costs of buying and selling and improving the property, your capital gain on the sale will likely be lower than the first back-of-the-envelope calculation that you made. And then subtracting the $250,000 exclusion from this gain figure often brings it below zero.
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.
Yes! Married couples receive up to $500,000 in gains tax free and Single filers get $250,000. You must have lived in the home at least 2 out of the last 5 years.
Yes, under certain circumstances it is true that you can sell your home and not incur capital gains tax. You must meet 2 tests, in general, to avoid capital gains of up to $250,000 on your primary residence or up to $500,000 if you file jointly. You must have owned and used your home for 2 of the 5 years prior to its sale. See this excerpt from the IRS website: “In general, to qualify for the exclusion, you must meet both the ownership test and the use test. You are eligible for the Section 121 exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you are not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. Refer to Publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule.” And please be sure to check this link for full details: https://www.irs.gov/taxtopics/tc701.html.
Charlotte Dougherty is a registered representative of Lincoln Financial Advisors a broker/dealer (Member SIPC) and a registered investment advisor. Lincoln Financial Advisors does not provide legal or tax advice. CRN-1584099-090116
It is true, but depending on several factors, such as marital status, the profit you made, and how long you have lived in the house. For married filing jointly, they can dodge the capital gain tax for the profit of $500K. For single, the capital gain is limited to only $250K. Besides the marital status and profit amount exclusion, IRS stipulates two other restrictions-- the ownership test and the use test. You are eligible for the aforementioned profit exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You may go to the IRS website and search for the publication 523 for the complete eligibility requirements, limitations on the exclusion amount, and exceptions to the two-year rule. Best!