Selling your home and Capital Gains

Capital Gain: A capital gain is a profit that results from investments into a capital asset, such as stocks, bonds or real estate, which exceeds the purchase price. It is the difference between a higher selling price and a lower purchase price, resulting in a financial gain for the investor.[1]  from Wikipedia.

So, do you have to pay Capital Gains when you sell your home?

Changes to the tax laws in 1997 provided a new exclusion for gain from the sale of a principal residence.

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 two 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 tax paperwork (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.

The law applies only to homes that qualify as a principal residence.

  • This specification eliminates vacation homes, timeshares, or other types of real estate.
  • The home must have actually been lived in as a principal residence for two of the five years immediately preceding its sale.
  • For taxpayers in the categories of single HEAD OF HOUSEHOLD, or married filing separately, the exclusion is $250,000. For married taxpayers filing a joint return, the exclusion is $500,000.
  • The exclusion can be used only once every two years.
  • Gain in excess of the exclusion is taxable, usually as long-term capital gain.

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.  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 can, however, turn a rental house into your primary residence, making the sale of it eligible for the exclusion. This is accomplished when you meet the IRS use and ownership tests: You own and live in the home for two out of the five years before the sale.

However, as informative as this is, the best thing is to consult your Tax Preparer or attorney for your particular circumstances.