In recent years, tax regulations on capital gains earned from the sale of one’s primary residence have changed significantly. Understanding these considerations is particularly important for homeowners who have recently sold their homes or are in the process of doing so. This can help you assess any potential tax liabilities or benefits that may arise from the sale of your home.
Tax Exemptions
If you have owned and lived in your home for at least two of the last five years before the sale, then up to $250,000 of profit may be exempt from federal income taxes. If you are married and file a joint return, that amount doubles to $500,000. To qualify for this exemption, you cannot exclude the gain on the sale of another home within two years of this sale.1,2
Taxpayers who do not qualify or choose not to claim this exclusion must report gains on their tax return. If you are eligible to exclude the entire taxable gain from the sale, you may not need to report it unless you receive a Form 1099-S or fail to meet the above requirements.1,2
If you sell your home for less than you paid for it, unfortunately, you can’t deduct the loss. Regardless of your situation, it is recommended to consult with your financial and tax professionals before conducting any real estate transaction.
Understanding the Exceptions
Even if you do not meet the above requirements, you may qualify for this exclusion if:1
- You receive the house in a divorce settlement.
- You are able to count short-term absences as time lived in the house.
- A surviving spouse who has not remarried can count the time that the deceased spouse lived in the house.
It is important to note that the 5-year qualification period can also be suspended for up to 10 years in cases where any spouse has served on “qualified official extended duty” as a member of the military, foreign service, or federal intelligence agencies.1
Even if you don’t pass the 5-year rule, you may still be eligible for a reduced exclusion if you have experienced a change in employment or health, or due to unforeseen circumstances such as divorce or multiple births from a single pregnancy.
If you are considering selling your home, I encourage you to familiarize yourself with these important tax considerations and how they may affect your financial plan. As always, please feel free to reach out if you have questions or concerns about your personal situation.
1IRS.gov, August 7, 2023
2The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.