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 called a capital gain that is usually subject to federal taxes, but the government offers a special tax break for gains made on the sale of a home. 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.
Capital Gains Tax Basics
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. In 2017, the long-term capital gains tax rate is 0 percent if your normal income tax rate is 15 percent or less, 15 percent if your normal income tax rate is 25 to 35 percent and 20 percent if your normal tax rate is 39.6 percent. Gains on assets held a year or less 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.
Home Sale Exclusion
The Internal Revenue Service offers a tax exclusion of $250,000 on capital gains you make when selling a home. In other words, you can keep $250,000 of profits you make when selling a home tax-free if you qualify. 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.
A first-time home seller that meets the ownership and use test can use the home sale exclusion. The same cannot be said for people who have sold other homes in the past. According to the IRS, you can't avoid taxes on gains when selling a home 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.
- Internal Revenue Service: Topic 409 - Capital Gains and Losses
- Internal Revenue Service: Capital Gains and Losses – 10 Helpful Facts to Know
- Internal Revenue Service: Topic 701 - Sale of Your Home
- Internal Revenue Service: Publication 523 - Main Content
- Intuit: Tax Aspects of Home Ownership: Selling a Home
- Taxes: What's New for 2017?
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