Selling a home is a major financial decision that can have a big impact on your personal assets, monthly expenses and taxes. When you sell property that has increased in value, you make a profit. Profits on capital assets are called a capital gains, and they are usually subject to federal taxes. In some situations, you will owe tax on the sale of real estate. Fortunately, the government offers a special tax break for gains made on the sale of a home used as your residence. The tax break for home sale gains is not exclusive to first-time sellers, although people who have sold homes in the past face additional requirements to qualify.
If you sell a home that you have used as your primary residence, you will likely qualify for valuable tax breaks on the proceeds from the sale. These tax offers are not limited to first-time sellers, and can be used repeatedly as long as certain conditions are met.
Capital Gains on a Home Sale are Reduced for Residences
A capital gain is the difference between the amount you get when you sell an asset and its original cost. Capital gains are a form of taxable income, but gains you make on property you hold longer than a year – also called long-term gains – are generally taxed at lower rates than ordinary income.
If certain criteria are met, the IRS offers a tax exclusion of $250,000 on capital gains you make when selling a home. In other words, if you qualify, $250,000 of those profits will not be taxed. If you are married and file a joint tax return, you may be able to exclude up to $500,000 of gains from taxation.
You have to meet two basic requirements known as the ownership and use tests to exclude home sale gains. To satisfy the ownership test, you must have owned the home for two of the past five years and to pass the use test, you need to have lived in the home as your main residence for two of the past five years. If you plan to exclude $500,000 as a joint filer, you and your spouse must both meet the use test.
Exceptions for Individuals with More than One Sale
A first-time home seller that meets the ownership and use tests can use the home sale exclusion. The same cannot be said for people who have sold other homes in the past. You can't avoid capital gains tax on a house sale if you excluded the gain on the sale of a different home within the past two years. In the case of joint filers, the $500,000 exclusion is only available if neither spouse excluded gains on the sale of a different home within the past two years.
2018 Capital Gains Percentages
For the 2018 tax year, the long-term capital gains tax rate is 0 percent if you make up to $38,600 per year; 15 percent if you make over $38,600 per year up to $425,800 per year and 20 percent if you make over $425,800 per year. Short-term capital gains are taxed as ordinary income. If you sell a home at a price that is less than what you paid, you have a capital loss, which is not taxable.
2017 Capital Gains Percentages
For the 2017 tax year, the long-term capital gains tax rate is 0 percent if you make up to $37,950 per year; 15 percent if you make over 37,950 per year up to $418,400 per year and 20 percent if you make over $418,400 per year.
- IRS: Topic 409 - Capital Gains and Losses
- IRS: Capital Gains and Losses – 10 Helpful Facts to Know
- IRS: Topic 701 - Sale of Your Home
- IRS: Publication 523 - Main Content
- NerdWallet: 2018 Capital Gains Tax Rates — and How to Avoid a Big Bill
- The Motley Fool: Long-Term Capital Gains Tax Rates in 2017
- The Motley Fool: Your Guide to Tax Brackets in 2017
Gregory Hamel has been a writer since September 2008 and has also authored three novels. He has a Bachelor of Arts in economics from St. Olaf College. Hamel maintains a blog focused on massive open online courses and computer programming.