facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog search brokercheck brokercheck Play Pause
Understanding the Home Sale Tax Exclusion Thumbnail

Understanding the Home Sale Tax Exclusion

You've thought long and hard about it and have decided: It's time. You're going to sell your house. And while this is an exciting time, it also comes with many questions. Should I use an agent? How much should I list it for? What do I do with the cash after the sale?

All of these are important. But one thing you cannot ignore is this: Do you have to pay capital gains tax on the proceeds of your home sale?

The answer is that you do unless you have the Home Sale Tax Exclusion.

This important exclusion helps most homeowners avoid the burden of a heavy tax on the sale of their homes during a move. Review the requirements and see how a person qualifies for the Home Sale Tax Exclusion.

Qualification for the Exclusion

To qualify for this massive tax break, homeowners must do several things. First, they must own the home. This may seem like a silly distinction, but the seller must have legal ownership of the property without any strange situation that could interfere with that person's ability to sell. Second, they must have used the home for two years as their primary residence. This two-year period is the minimum time the homeowner must have lived at the property in five years, giving flexibility to those who have moved away temporarily.1

This allows home rentals. If a person lived in a home for a year, moved somewhere else, rented the house for another year, and moved back for the final year of that person's ownership before selling, they would still qualify.

Another critical component of this exclusion is total profit. You must know your cost basis to calculate how much you made or lost on your homeTake full advantage of qualified expenses and keep good records for items like attorney fees, closing costs, selling expenses, and home improvements.

Exclusion can only be applied up to $250,000 for a single individual, and this can be extended to $500,000 for married couples that file their taxes jointly. Note that this is profit, not total value. A person can sell a home for $800,000 and still qualify if they initially paid $600,000 for the house.

Last, this exclusion is only available every two years. This means that if you sell a home, move to a new house, then decide after a year that you don't like it and sell it immediately, you may not get this exclusion.

Not Qualifying for the Exclusion

If one of the rules for this exclusion isn't met, the seller does not qualify for this tax break. They will be required to pay a capital gains tax on the profit of the sale of the property. But how much?

That depends.

Capital gains are based on income, with most Americans paying a maximum of 15%. Those making over $445,850 will pay higher amounts. Even at 15%, this tax can take a big chunk of people's profit from their home sales. Making decisions that align with the exclusion can save thousands when it is time to sign contracts and transfer ownership.2

A Valuable Perk for Homeowners

This exclusion helps most homeowners avoid paying high taxes on selling their only home and moving to a new one. If you're considering selling your home and aren't sure if you might have to pay, reviewing the requirements with your advisor and accountant to see if you qualify can take a big weight off your shoulders.

  1. https://www.irs.gov/taxtopics/tc701
  2. https://www.investopedia.com/ask/answers/06/capitalgainhomesale.asp

This content is developed from sources believed in providing accurate information and provided by Twenty Over Ten and Linden Wealth Management LLC. It may not be used to avoid any federal tax penalties. Please consult legal or tax professionals for specific information regarding your situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.

Schedule Your Initial Conversation