What You Need To Know About Capital Gains Tax And Selling Your Home

What You Need To Know About Capital Gains Tax And Selling Your Home

Image titleWhat's the best tax break available to Jane and John Q. Public? If they're homeowners, it's selling their house.

Homeowners already know the many tax breaks that Uncle Sam offers, most notably mortgage interest and property tax deductions. Well, he also has good tax news for home sellers: Most of them won't owe the Internal Revenue Service a single dime.

When you sell your primary residence, you can make up to $250,000 in profit if you're a single owner, twice that if you're married, and not owe any capital gains taxes.

"Most people are not going to have a tax obligation unless their gain is huge," says Robert Trinz, senior analyst with Thomson Reuters Checkpoint.

Some sellers are surprised by this break, especially if they've been in their homes for a while. That's because before May 7, 1997, the only way you could avoid paying taxes on your home-sale profit was to use the money to buy another, more-expensive house within 2 years. Sellers age 55 or older had one other option. They could take a once-in-a-lifetime tax exemption of up to $125,000 in profits. And in all instances, there was Form 2119 to fill out to show that you followed the rules.

But when the Taxpayer Relief Act of 1997 became law, the home-sale tax burden eased for millions of residential taxpayers. The rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts.

"There is some logic to this law change because most people under the prior rules didn't recognize a taxable gain, because they rolled it over into another residence," says Trinz. "The change essentially makes it easier to dispose of your residence."

Still some requirements to meet

If you used pre-1997 rules for residential sales, don't worry. That doesn't disqualify you from claiming the exclusion on any residential sales now. The law change applies to all sales since it took effect.

Another bonus to the new rules? You don't have to buy another home with your sale proceeds. You can use the money to travel Europe in style, buy a recreational vehicle and drive across the country or get all those designer shoes you never could afford.

Even better, there's no limit on the number of times you can use the home-sale exemption. In most cases, you can make tax-free profits of $250,000, or $500,000 depending on your filing status, every time you sell a home.

Ah, but we are talking taxes here. You did notice that phrase "in most cases," didn't you? Before you put a "for sale" sign in the yard, you need to make sure your house-sale situation is one of those "most cases."

First, the property you're selling must be your principal residence. That means you live in it. This tax break doesn't apply to a house or other property that you have solely for investment purposes. In those cases, the usual capital gains rules apply.

You also must live in that principal residence for 2 of the 5 years before you sell it. This is known as the use test. It also means, practically speaking, each sale must be at least 2 years apart.

That still leaves you room to make some money on several properties. You can sell your residence this year, pocket any gain within the tax limits and buy a new residence. Then 2 years later, you can do the same thing, again and again, every 2 years.

And you no longer have to worry about that pesky prior-law reporting requirement. When your gain doesn't exceed the limit, you don't have to file anything with the IRS.

Second home sales take a tax hit

Owners of multiple homes, however, will now find it's not as easy to shelter sale profit as it used to be.

A provision of the Housing Assistance Act of 2008, the bill designed primarily to provide relief to some homeowners facing foreclosure, could cost the owners of a vacation or other type of 2nd property -- when they sell.

Previously, you could move into the 2nd property, make it your primary residence, live there for 2 years and then sell it and pocket most or all of the profit.

Now, however, even if you convert a 2nd piece of real estate to your primary home, you'll owe tax on part of the sale money based on how long the house was used as a 2nd, rather than your main, residence.

Special rules for married couples

While spouses get double the exclusion of single home sellers, couples also have some additional considerations when it comes to determining whether their sale is tax-free.

Either spouse can meet the ownership test. For example, the IRS says it's OK if you owned the home for the past 2 years, but you just added your new spouse to the title when you got married 6 months ago. Since you owned the residence for the requisite time, as joint filers, you have no problem meeting the ownership test even though your spouse wasn't an official owner for that long.

However, both spouses must pass the use test; that is, each must live in the residence for 2 years. But the shared use doesn't have to be while you file jointly. If you and your now-spouse shared the home for 1 1/2 years before tying the knot and then 6 months as newlyweds, the IRS will allow you to claim the exemption. But if your better half didn't move in until the wedding day, you're out of tax-exclusion luck.

It's your gain, or profit, that determines the size or lack of a tax bill. In fact, you can sell your house for $1 million and still not owe Uncle Sam as long as the profit portion was not more than $250,000 or $500,000, depending on your tax filing status. If you can exclude all the gain, then you owe no taxes.

Thinking about selling your house and moving up or downsizing?  Click here to find our how much your home is worth and start your home search. 

Read more:  http://www.bankrate.com/finance/taxes/capital-gains-and-your-home-sale-1.aspx#ixzz4B6Gf08lg 

Sherry Cabrera Headshot
Phone: 214-454-6969
Dated: June 9th 2016
Views: 612
About Sherry: Sherry was raised in Mississippi and moved to Dallas 16 years ago with her daughter. Prior to movin...

Property Search

Chat with us now!

A real live chat operator is online now! We can immediately get your questions answered or make sure we get it to an agent who can.

RSS Feed

View our latest blog posts in your RSS reader. Click here to access. RSS

Search Blog

Recent Blogs

Howl 0 Ween Yappy Hour October 26 - Bring your mutts, pups and pooches t
Grapevine Veterans Day Parade - Salute military veterans at the Vete
GRAND OPENING APRIL 2017 WALSH DEVELOPMENT - Meet The First Home Builders of Wals
The Great News About Rising Prices - Recently there has been a lot of tal

Our Bloggers

Kim Allman - 5
Cara Balderas - 16
Tami Bennett - 45
Jessica Boozer - 18
Rhonda Borgne - 1
Olivia Borowski - 1
Jennifer Boyd - 2
Deborah Boyd - 16
Jamie Brannagan - 1
Annette Bruen - 20
Moira Brunken - 11
Beverly Bryant - 13
Sherry Cabrera - 359
Ana Cantu - 1
Lisa Cardillo - 52
Bob Cardillo - 4
Shea Cargile - 12
Tori Cecil - 3
Lucina Cervantes - 11
Troy Copeland - 11
Gregory Cornett - 2
Angela Cotten - 44
Missie Craig - 12
Greg Cunningham - 2
Leah Ecob - 15
Kristine Edens - 3
Jill Elliott - 99
Laneal Ernest - 9
Nicole Espinosa - 27
Christopher Evans - 1
Heather Feragotti - 8
Mark Fischer - 2
Susan Florsch - 12
Jennifer Flynn - 3
Leslie Fogle - 101
Michelle Foreman - 110
Larry Frassinelli - 6
Chad Gabriel - 58
Malci Gariani - 1
Shalee Garza - 10
Cassie Gillock - 2
Ryan Gonzales - 3
Wilma Goodwin - 2
William Graves - 5
Sandra Hunt - 50
Bill Hurd - 3
Gary Hutchings - 20
Trenton Johnson - 15
Felicia Johnson - 77
Jemi Khan - 26
Leigh Klotz - 4
Amber L Johnson - 5
Michele Lafortune - 22
Wanda Lewis - 2
Mark Linder - 1
Noreen Lodhi - 9
Stacy Lynn Massar - 27
Hiwot Melaku - 1
Jennifer Menting - 17
Mikki Migis - 8
Richard Mikus - 1
Sean Moniri - 21
Naddia Morales - 10
Keith Moses - 9
Mark Mulch - 19
Erick Murphy - 6
Steve Murray - 1
Julie Nicholson - 10
Nikki Okpuzor - 3
Lori Oliver - 47
Alan Oliver - 7
Kelly Oltmann - 2
Kaysone Orlando - 1
Holli Paddio - 3
Ancy Philips - 7
JP Piccinini - 48
Julie Ann Pickering - 85
Ann-Marie Pope - 2
Mimi Rader - 1
Shelia Randolph - 33
Terri Anne Ray - 1
Teneka Ray - 1
Go 2 Girls Realty - 173
Bethany Rowan - 15
Kelly Rumney - 9
Amy Jo Saenz - 3
Linda Scardis - 4
Sandy Setliff - 208
Christine Shannon - 29
Rene Sinclair - 27
Shelby Smith - 3
Bryce Smith - 1
Monica Solkhon - 1
Rodrigo Sotomayor - 16
Brent Stack - 1
Jenna Stanley - 9
Kelley Stubbs - 3
Melodie Sulgrove - 1
Seana Taylor - 205
Mary Taylor - 13
Julian Taylor - 17
Erica Taylor - 40
Angela Taylor - 1
Karla Terrell - 2
Joey Thomas - 2
Jason Todd - 24
Andrea Trimble - 55
Miguel Umana - 6
Staci Van Allen - 12
Diane Velez - 17
Debbie Viverito - 132
Nick Walton - 75
Spring Weeks - 8
Jessica Wilson - 5
Michael Worley - 160
Keisha York - 30
Debbie Zurita - 17

Saved Properties

This is a list of your favorite properties. We will email you if a property is reduced or leaves the market.

Click 'Save' to add a property to this list.

Register / Login

New & returning visitors please enter your information to login.

By clicking 'register' you are agreeing to our terms of use & giving us expressed written consent to contact you.

Questions? Comments? Complaints?

This message will go directly to the head of our team.

Location & Address

JP And Associates REALTORS
6175 Main Street #355 Frisco Texas 75034
Frisco, TX

Other Locations