Capital Gains Tax and the Sale of Your Home
Homeowners interested in selling a primary residence may want to know more about the capital gains tax and applicable exclusions to avoid handing over a chunk of the profits to Uncle Sam. Whether a seller is able to qualify for a full or partial exclusion, either translates to less money given to the IRS.
Learn more about capital gains tax and full and partial exemptions on the sale of a home today.
What is Capital Gains Tax?
This is a tax on the profit from the sale of a home or other major asset. If a homeowner has owned their home for over one year, any profit would be a “long term” capital gains and the rate of taxation would depend on the seller's tax bracket. Significant exemptions exist for those selling a primary residence. However, those who own and are planning to sell a second home or vacation home may be able to use the exemption available for primary residences. It would be important to speak to a tax accountant to determine whether or not the sale of a second home could qualify and some planning would be necessary to take advantage of such an exemption.
Have You Heard of the $250,000/$500,000 Exemption?
Due to the Taxpayer Relief Act of 1997, an exemption is allowed to individuals and couples on the sale of a primary residence. Singles may receive an exemption of $250,000 in capital gains. Couples may get up to $500,000. No federal income tax is levied on the profit of a principal residence up to $250,000 and $500,000 respectively. In addition to the sale of a house, other residences that can qualify for the exemption include condominiums, apartments, fixed mobile homes and stock-cooperatives.
The law can be applied on any number of sales of a primary residence. Homeowners must have lived in the home for a minimum of 2 out of 5 years prior to a sale. This does not apply to any properties that are considered to be investment or rental properties. Medical exemptions and unforeseen circumstances can allow an owner to get around the 2 out of 5 year rule. Those that may not qualify for a full exemption may be able to get a partial exclusion. This is certainly something to consider whether selling a home in Hutto TX or elsewhere.
What is a Partial Exemption?
Some sellers may not be able to get a partial exemption on the sale of a home. Documentation of the following circumstances would be necessary. Homeowners may qualify for a partial exemption if:
- A new job or job change required the sale of a house;
- Health issues necessitated the move; or
- Natural disasters or unforeseen circumstances forced a homeowner to move.
This exclusions only apply to any profit from the sale of a primary residence. Homeowners who sell at a loss do not get to benefit from these exclusions. Additional profit on the sale of a primary residence over the maximum limit of $250,000 and $500,000 would still be subject to capital gain taxation.
A seller who has sold a primary residence needs to declare any profit on Schedule D. The amount is reported as a capital gain and a short-term capital gain and long-term capital gain are reported differently. A short-term capital gain is reported on a home owned for a year or less. Speak to a tax accountant directly for additional details.
Paying Capital Gains Taxes on a Home Sale
Sellers are obligated to pay capital gains taxes when appropriate. However, some may be unaware of the exemptions that may apply. Learn more about requirements and any changes before the sale of a home.