Is it true that you can sell your home and not pay capital gains tax?
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, which did not change when the Tax Cuts and Jobs Act of 2017 was introduced.
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.
The Taxpayer Relief Act of 1997 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.
To learn more, read: Avoid Capital Gains Tax on Your Home Sale.
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 depends on how long you owned and lived in the home before the sale and how much profit you made. If you owned and lived in the place for two of the five years before the sale, then up to $250,000 of profit is tax-free.
If you are married and file a joint return, the tax-free amount doubles to $500,000. The law lets you "exclude" this much otherwise taxable profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)
You can use this exclusion every time you sell a primary residence, as long as you owned and lived in it for two of the five years leading up to the sale, and haven't claimed the exclusion on another home in the last two years.
If your profit exceeds the $250,000 or $500,000 limit, the excess is reported as a capital gain on Schedule D.
How do I qualify for this tax break?
There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free:
- Ownership: You must have owned the home for at least two years (730 days or 24 full months) during the five years prior to the date of your sale. It doesn't have to be continuous, nor does it have to be the two years immediately preceding the sale. If you lived in a house for a decade as your primary residence, then rented it out for two years prior to the sale, for example, you would still qualify under this test.
- Use: You must have used the home you are selling as your principal residence for at least two of the five years prior to the date of sale.
- Timing: You have not excluded the gain on the sale of another home within two years prior to this sale.
If you're married and want to use the $500,000 exclusion:
- You must file a joint return.
- At least one spouse must meet the ownership requirement, and both you and your spouse must have lived in the house for two of the five years leading up to the sale.
Even if you don't meet all of these requirements, there are special rules that may allow you to claim either the full exclusion or a partial exclusion:
- If you acquire ownership of a home as part of a divorce settlement, you can count the time the place was owned by your former spouse as time you owned the home for purposes of passing the two-out-of-five-years test.
- To meet the use requirement, you are allowed to count short temporary absences as time lived in the home, even if you rented the home to others during these absences. If you or your spouse is granted use of a home as part of a divorce or separation agreement, the spouse who doesn't live in the home can still count the days of use that the other spouse lives in that home. This can come into play if one spouse moves out of the house, but continues to own part or all of it until it is sold.
- If either spouse dies and the surviving spouse has not remarried prior to the date the home is sold, the surviving spouse can count the period the deceased spouse owned and used the property toward the ownership-and-use test.
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!
In most cases, yes. Single status homeowners are permitted to sell their house without incurring capital gains taxes as long as the gain doesn't exceed $250,000. For married couples, the limit is $500,000. Anything above those limits is subject to capital gains tax rates. Keep in mind, other factors like realtor commissions, home improvements, and title fees reduce the "appreciated value" downwards in the seller's favor.
However, a homeowner may not benefit from this capital gain tax exemption more than once within a 2 year period, which is really only applicable to those who own multiple properties or someone who sells their house frequently. Also, the property being sold needs to be a primary residence and occupied as such for 2 out of the last 5 years of ownership. In other words, houses sold within a time period of 23 months are subject to capital gains taxes. On the other hand, say you recently sold a house where you started off living in it for 1 year, then moved out and turned it into a rental for 3 years, but eventually moved back into that same house for 1 more year... That type of sale actually qualifies for the 2 out of 5 years exemption.
Yes. This is one of the best tax gifts around that the average person can take advantage of. If you own and use your primary residence for two of the last five years (the years don't have to be back to back), you can exclude a gain of up to $250K if you are filing single or up to $500K if married and filing jointly. This is also possible if the sale of the primary residence is due to a divorce, but certain language must be written into the separation agreement.