Capital Gains Tax at Sale

The capital gains tax is often overlooked by property buyers, but it can your biggest tax liability when you sell the property. Capital gains tax can take a huge chunk of your profits, even if you have lived in a house for years, so it’s best to know what it is and how best to deal with it.

In the United States, if you have owned the home and lived in it for a minimum of two years, you can exclude up to $250,000 in profit from the sale of a main home. Married couples are entitled to $500,000 in profit.

The two years do not have to be consecutive, but the home must have been your main residence, so you need to have lived in the house for at least 24 months during the 5 years prior to the sale of the house. This 2-out-of-5 year rule can be used to exclude your profits each time you sell or exchange your main home. But, as a rule, you can claim the exclusion only once every two years.

Qualifying for a Partial Exclusion

If the location of your job changed, you have health concerns or other unforeseen issues beyond your control; you may be eligible for an exception to the 2-out-of-5 rule. If you started a new job or if you are moved to a new location by your employer, the exception applies. If you are selling the house for health or medical reasons, be prepared to document the reasons to the IRS with a letter from your doctor. Among the “unforeseen circumstances” recognized by the IRS are natural disasters, acts of war, acts of terrorism, death, divorce, separation and multiple births from the same pregnancy. Any of these situations can qualify you for a partial exclusion if you are selling your home and have lived there less than 2 years.

Calculating Your Capital Gain

To calculate your capital gain or loss, subtract your cost basis from your selling price. The cost bases is determined by adding up the purchase price, plus the purchase costs (title and escrow fees, real estate commissions, etc.), plus improvements (remodeling a kitchen, replacing a roof, etc.) and selling costs (title & escrow fees, real estate agent commissions etc). Take this total and then subtract the accumulated depreciation to arrive at the cost basis.

Subtract the cost basis from the selling price to figure your gain or loss. To determine your taxable gain, subtract any maximum or partial exclusion from the gain. The gain is reported as a short-term capital gain if you owned your home for one year or less, and it’s reported as a long-term gain if you owned the house for more than one year.  Any loss from the sale of your main home can not be deducted.

  • This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Tax laws in particular change frequently. Seek competent legal counsel for advice on any legal matter. If you need help with a Tax Problem please click here to consult with a Tax Lawyer in your area.
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