The Tax Implications of Selling Your Home

With home prices rising significantly over the past several years, many homeowners are unsure about the tax implications of selling their homes.

Fortunately, the Internal Revenue Service (IRS) offers exclusions that can greatly reduce or eliminate the capital gains tax on the sale of your primary residence. Here are the details:

Exclusion Amount:

One of the primary benefits available to homeowners is the capital gains exclusion.

For single filers, up to $250,000 of profit from the sale of a home can be excluded from taxable income. For married couples filing jointly, this exclusion doubles to $500,000.

This substantial exclusion can provide significant tax relief and is a key component of tax planning for homeowners.

Exclusion Rules:

To qualify for this exclusion, homeowners must meet specific criteria:

  1. The home must have been the owner’s primary residence for at least two of the past five years. However, it is important to note that these two years do not need to be consecutive.
  2. You can only use this exclusion once every two years.

These rules offer flexibility, allowing homeowners to maximize their benefits even if they have not lived in the home continuously.

Calculating Your Gain:

Calculating the gain from the sale of your home is a critical step in determining your tax liability.

The capital gain is calculated by subtracting the “basis” of the home from the sales price. The basis is the original purchase price of the home plus the cost of any improvements you’ve made over the years. Therefore, it’s essential to keep detailed records of all home improvements, as these can significantly increase your basis and reduce your taxable gain.

Additional Considerations:

Several other factors can impact the taxation of home sales.

For instance, if you inherit a home, the basis typically steps up to the market value at the time of the previous owner’s death. This could potentially reduce any capital gains when the home is sold. Moreover, if homeowners are simply in need of liquidity and do not wish to move, they may want to consider other options, such as a home equity line of credit (HELOC). This option can provide liquidity without triggering immediate tax consequences.

 

By understanding these rules and keeping thorough records, homeowners can effectively manage and potentially minimize the tax impact of selling their homes.

 

 

 

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certified financial planner Marshall Clay wears a gray jacket and white shirt while posing for professional photo in office

Marshall Clay CFP, J.D., is a Partner and Senior Advisor at The Welch Group, LLC, specializing in providing Fee-Only investment management and financial advice to families throughout the United States. Marshall is a graduate of the United States Military Academy in West Point, New York, the Cumberland School of Law in Birmingham, Alabama, and is a CERTIFIED FINANCIAL PLANNER™.  In addition, Marshall is a frequent guest on local television stations as an expert on various financial planning matters.

 

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