Providing practical, no-nonsense real estate information and advice for property owners, buyers, and sellers.
You probably already know that you are responsible for paying capital gains tax when you earn a profit on the sale of real estate. Before 1997 the only way to avoid paying taxes on a home-sale profit was to use the proceeds of the sale to buy a new, more expensive home within two years. If you were 55+ you had one other option - take a one-time (that's once-in-a-lifetime) tax exemption of up to $125,000 in profits. Thankfully, the Taxpayer Relief Act of 1997 became law and that looming tax burden was removed for millions of residential taxpayers.
The good news is that a per-sale exclusion amount applies now. The great news is that most homeowners won't owe the IRS a single penny. The reason being is that you can make up to $250,000 profit if you're single ($500,000 if you're married), and not owe any capital gains taxes. Of course, you must meet some specific requirements.
Requirements for Claiming the Exemption -
1. Your home must be your primary residence- This means the home must be one that you live in most of the time. If you have more than one property, you should choose the one that is closest to your work, children's schools, etc. as the IRS will apply certain tests to make sure the home you choose to receive the exemption is actually your primary residence.
2. You must have owned your home for at least the last two years.
3. You must have lived in the home for at least two of the last five years.
There is an exception to these requirements, though.
The ownership and residency requirements to claim the exemption don't apply in 'unforeseen circumstances." If you have an unpredictable event that happens on short notice (serious illness, family death, divorce, job change more than 50 miles away) you may be eligible for a partial deduction based on how long you lived in the home. For example, if you lived in the home for one year you can deduct 1/2 of the total profit from the home sale for a maximum deduction of $125,000 (or $250,00 for a married couple).
There is no limit to the number of times you can use this tax break!
Thankfully, this exemption can be used over and over again as long as you meet the requirements. You can buy a home, live in it for two years, and then sell and exclude the capital gain (up to the max deduction, of course) over and over and over again.
Don't forget to deduct the following expenses from your gain!
1. Home improvements that are capital improvements over the course of your ownership. Some examples include new flooring, complete kitchen remodel, replacing the heating system. new plumbing. Normal home repairs can't be deducted, though
2. Many of the expenses you incur to sell the home. You can deduct broker's fees, escrow fees, notary fees, title search fees and other closing costs.
If you can exclude your gain, you don't have to report it!
That's right. If you meet the requirements to exclude the capital gain on the sale of you real estate you DO NOT need to report the sale to the IRS. You must, however, report the gain if you can exclude only a portion or if the IRS sends you an income reporting document such as a 1099-S.
Losses aren't deductible.
Unfortunately, if you have a loss on the sale of your home you cannot deduct it from your taxable income.
For more information about capital gains tax on a home sale, you can visit Publication 523 at IRS.gov.