Ten Things You Need to Know About Capital Gains Tax on a Home Sale, It is very likely that you know that when you sell your property, you may exclude up to $250,000 of the capital you gained form your taxes. Most the home owners don’t pay tax on the home they just sold. The reason for this is that the Internal Revenue Service (IRS) will let you exclude gains of up to $250,000 from your tax return, not all properties will qualify for the exemption, but there are limits on how often they can claim the benefits. Here you can find the top ten facts sellers should know about the tax exclusion.
- Exclusion will apply to main homes. The main home is where you live most of the time. If you have more than one home where you live and own, you can choose which one to be your main home. You can’t be dishonest in order to get the tax concession. The IRS will make many test to check which is your primary residence.
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- To claim the exception, you must live in the home for at least two out of five years before you can sell. You could live in the property for 18 months, move out for a year, then you can move
back in for another six months and can still have the home sale exception.
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- Must own the home for at least two out of the past five years. The same tests will apply as above.
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- The ownership and the residency tests will not apply in “unexpected circumstances”. The unexpected circumstances are random events that can happen at short notice and can affect the ability to remain in your home. For example, ill-health, divorce, family death or new job that makes you move
more than 50 miles away can count as an unexpected circumstance. If something like this happens you could still claim the home sale exclusion even if you do sell your home before the two-year qualifying period is up.
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- The maximum deduction can be less than $250,000. The home owners can deduct all the gain up to $250,000. Home owners can claim unexpected circumstances exclusion when only a partial deduction is based on their occupancy. A home owner that has lived for the whole two years before they sell the home, they can deduct the first $250,000 of the profit from the taxable income. If a home owner gets divorced and moves out after only six months can only claim one-fourth of the amount, which would be $62,500.
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- Married couple that file a joint return can be deducted up to $500,000 of gain. They should both live in the property for
at least two out of the five years right after the preceding sale. They don’t have to co-own the property, only one spouse can meet the two years out of the five-year ownership test.
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- There is no limit on the number of the time you can use the tax break. Qualifying home owners can buy a home, live in it for two years, later sell the home and can exclude the capital gain, and later repeat the process. You could repeat the process as many times as you want.
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- The gain can be lower than you think. Many of the expenses you experience while selling your home and improving it can be deducted from the sale price in order to reduce you net taxable gain
. You could deduct the appraisal fees, advertising fees, escrow fess and other closing costs. You could also deduct the cost of improvements as upgrading the kitchen systems or a new carpet. The deductions can help you lower your tax bill.
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- In most of the cases you don’t have to report the gain. The home sellers that can exclude the gains, don’t have to report the sale to the IRS. But you must report the gain if you can exclude only part of it or if the IRS sends you information reporting documents such as the 1099-S.
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- Home sale losses are not tax deductible. Tax law doesn’t allow the taxpayers to deduct a home sale loss from their
taxable income. The exclusion will apply only to the capital gains.
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