Home prices in the US are up 32% on average over the last 3 years (according to Redfin) so there are a lot of homeowners sitting on big gains.
It’s a good idea to know what the taxes will be if you sell your house this spring.
Luckily the answer is pretty simple. (sort of)
Part of the American Dream is buying and owning your own home, so our tax law incentivizes that. When selling your primary residence you’re allowed to exclude $250,000 of gain from capital gains taxes ($500,000 if married filing jointly).
Any gains above this are subject to capital gains tax, which are generally taxed at 15% or 20% depending on income.
To qualify for the $250,000 (or $500,000) exclusion you need to pass two tests: the ownership and use tests.
Ownership – you must own the house for at least two years.
Use – the house must be your primary residence for two of the last five years.
This IRS website tells you more about these two tests: https://www.irs.gov/taxtopics/tc701
That’s the simplest scenario, someone owning and using their house as a primary residence for more than two years. They get the $250,000 (or $500,000) exclusion.
What if your situation is a little more complex? Another common scenario we see is having to move before two years has passed.
There are a few exceptions to the two-year rule that allow you to get the full exemption:
A change in employment (at least 50 miles away)
Health problems that require you to move
Circumstances you didn’t foresee when you bought the house. Like a death in the family, losing your job and qualifying for unemployment, natural disaster
Check with a CPA/financial planner/attorney before counting on this third exception.
Read more about these exceptions here: https://www.nolo.com/legal-encyclopedia/qualifying-the-home-sale-exclusion-without-living-in-the-home-two-years.html.
It’s not uncommon for clients to have much more complex situations. (eg. moving into a house that they previously rented out, selling a house that was their primary residence and then they rented, selling a second home, etc.) These scenarios come up often and having a solid grasp of the tax impact is important so clients know what to expect and can maximize their hard-earned dollars.
If you’re unsure of how you may be taxed on a property sale let me know and I’m happy to provide my advice. Remember, I’m not a CPA so it’s wise to double-check with them.
I kept it simple here and only discussed selling your own house. In a future post I'll discuss the tax implications of selling business property.