Are you thinking about selling your home but worried about the additional tax it could generate?
It is possible that you could be one of the many who can sell your home while avoiding the capital gains tax.
According to Internal Revenue Code §121, income shall not include gain from the sale of property if the property has been owned and used by the taxpayer as the principal residence for a period aggregating at least two years out of the five years prior to its sale date. If you have held the property for less than a year, the capital gain is taxed as ordinary income, which could be rated as high as 37 percent.
However, there are some limitations and special circumstances.
The amount of gain that can be excluded from gross income from the sale of your home cannot exceed $250,000 or up to $500,000 if filing a joint return with your spouse. For married couples filing a joint return, you can qualify for the $500,000 exclusion if either spouse meets the ownership or use requirements. The only time you will be subject to capital gains tax is if you are over the limit from above. Regardless, if you do sell your home, you are required to report the sale on your tax return, even if the gain from the sale is fully excludable.
To understand the capital gain that might apply, your gain is calculated by taking the home’s selling price less deductible closing costs, selling costs, and the tax basis in the property. The tax basis is generally the cost of the home you originally paid and any additional capital improvements you have made to the home over the years.
For example, a single taxpayer purchased a home in 2015 for $300,000 and now the home is valued to be sold at $650,000. Assuming there were no capital improvements made to the home, the gain on the $650,000 sale would be $350,000. Then, we can factor in the $250,000 exclusion of gain, which leaves us with a $100,000 taxable capital gain. Since the property was held for over a year, the taxpayer is subject to long-term capital gains, which are usually taxed at 15 percent or 20 percent, based on their income tax bracket. In this circumstance, it could equate to $20,000 of additional taxes.
If you do not think you are eligible for the exclusion based on your current situation, there are many exceptions to the general rules that might still leave you eligible for a partial exclusion of capital gains. This could be from a change of employment, divorce, death in the family, doctor recommendations and many other scenarios.
We recommend you contact your Zinner & Co. Tax Team representative to discuss how you may be affected by the sale of your home.