Selling your home presents an opportunity to make up to $250,000 (or $500,000 for married couples) in tax-exempt capital gains income. If you sell a home and meet the specific criteria outlined below, you’re usually eligible for this major tax break.
What Does “Gain” Mean?
Lots of people assume “gain” simply refers to profit. They figure that if they purchased their home for $350,000 and sell it for $550,000, their gain is $200,000. But really, it’s not quite that simple. Which isn’t necessarily a drawback, because often the calculations work out even more in the seller’s favor than they would if things were that straightfoward.
In reality, your gain is determined by subtracting your selling costs, deductible closing costs, and tax basis in the property from the selling price.
Here’s a little explanation of these factors:
- Selling costs – These are costs commonly incurred during the process of listing and selling your home. Examples include your real estate broker’s commissions, advertising costs, title insurance, legal and escrow fees, administrative costs, and inspection fees.
- Deductible closing costs – These include points or prepaid interest on your mortgage and your portion of the prorated property taxes.
- Tax basis – This is your original purchase price, plus purchase expenses, plus the cost of capital improvements, minus any depreciation and casualty losses or insurance payments.
Am I Eligible for a Capital Gains Tax Break?
To qualify for up to $250,000 or $500,000 in tax-exempt capital gains on the sale of your home, you must meet these three criteria:
- Ownership – You need to have owned your home for at least two full years within the five-year period leading up to the sale of your home. These two years of ownership don’t have to be continuous, nor do they have to be the two years right before the sale.
- Use – The home must also have been your primary residence for at least two years within the five years preceding the sale. Again, it doesn’t have to be continuous or the last two years prior to the transaction. For example, if you owned the home and lived in it for two or more years, then rented it out for the two years preceding the sale, you’re still eligible for this tax break.
- Timing – If you’ve claimed an exemption on the gains of another home sale within two years prior to this new sale, you cannot exclude these new gains.
Consult your CPA or other tax professional to get more information and personalized tax advice.