- The IRS allows substantial profits from home sales without paying taxes on them
- To qualify for the exclusion, you must pass ownership and use tests
- Tax rules on home sales are tricky, so check with an expert
A profitable home sale need not boost your tax bill, but it pays to know the rules. Congratulations! You sold your house at a nice profit. But will the tax man take a big chunk of it? It depends. Here’s why.
Capital Gain Tax Exclusion
The IRS allows taxpayers to earn a substantial profit on the sale of your main home without having to pay taxes on it. Single filers can generally exclude up to $250,000 of home-sale gains from taxes, and those married and filing jointly can generally exclude as much as $500,000 under special rules.
However, to qualify for the maximum exclusions, all the following must be true (although the first two do not have to occur at the same time):
- You meet the ownership test, meaning you owned the property for at least two years — not necessarily continuous — during the five-year period ending on the date of the sale. (Either spouse can meet the ownership test for married filing jointly filers under the special rules.)
- You meet the use test, meaning you lived in the home as your main residence for at least two years — not necessarily continuous — during the five-year period ending on the date of the sale. (Both spouses must meet the use test for married filing jointly filers under the special rules.)
- During the two-year period ending on the date of the sale, you (and your spouse, under the special rules) did not exclude a gain from the sale of another home.
That’s how it works at a very high level. But keep in mind a number of variables could impact if — or how — you can claim the exclusion.
For example, members of the military may be able to suspend the five-year period for ownership and use in certain situations. And taxpayers who don’t fully meet the ownership and use tests still may be able to exclude a smaller amount of gain. Additionally, if you rented out the house, the rules get more complicated.
courtesy of: https://www.usaa.com/