You may be subject to capital gains tax based on your profit when you sell a property. If you meet certain conditions, you may be able to exclude a set amount of the gain from the sale of the home from your income and avoid paying taxes on the capital gain.
How much capital gain can be excluded from a home sale?
The maximum amount of capital gain that can be excluded from a home sale depends on your filing status.
- $250,000 for single filers.
- $500,000 for a married couple filing jointly.
Widowers who sell their homes within two years of their spouse’s death are eligible for the full $500,000 exclusion.
What are the criteria for excluding capital gains?
To qualify for the full exclusion amount, according to IRS, the following criteria must be met:
- The home being sold is your primary residence.
- You’ve owned the home for at least two of the five years preceding the sale.
- You’ve lived in it as your principal residence for at least two of those years.
Note: The years you’ve lived in it don’t need to be consecutive. Certain exceptions are available to those who are disabled or in the military, Foreign Service, intelligence community, or Peace Corps. - You didn’t acquire the home through a like-kind exchange (also known as a section 1031 exchange) within the last five years.
- You haven’t claimed the exclusion on another home in the last two years.
- You aren’t subject to expatriate tax, a government fee paid by those who renounce their citizenship or take up residency in another country.
If you don’t meet the full exclusion criteria, you may still qualify for a partial exclusion of gain. For example, if the main reason for your home sale is a change in workplace location, a health issue, or an unforeseeable event.
If you have a taxable gain on the sale of your home that you can’t exclude, report the entire gain on Form 8949.
How can I determine capital gain?
You can use your settlement statements from both the home’s sale and the home’s purchase to help determine:
- Your adjusted basis, the purchase price plus improvements minus depreciation, of the home.
- The amount of gain or loss on the sale.
You can also use documents about your home improvements to help figure out your adjusted basis in the home. If you are filing your return with Heard, your Tax Preparer will work through this analysis to determine how much capital gain can be excluded from your home sale.
What if there is a loss from the home sale?
A loss on the sale of your home used as a primary residence is not deductible. If there is an overall loss, there is no write-off for home sale as loss is not deductible. However, you may be able to claim a business property, such as an investment or rental property.