In a rising real estate market, taxpayers may end up selling their homes for much more than they paid just a few years ago. This would normally be a taxable gain, but the tax code provides an important exclusion for gains from the sale of a home.
There are a few conditions you need to make to use this exclusion and an overall limitation on how much of the gain you can exclude.
The Ownership and Use Tests
You must have owned the home for at least two of the past five years. This is the simplest condition you need to meet in order to qualify the exclusion.
However, you must also have lived in the home as your main home for at least two of the past five years. You can meet the ownership and use tests in different two-year periods.
If you own more than one home, this rule could limit your exclusion. The home you are selling must have been your main home for at least two of the past five years.
You can also only use the exclusion once every two years. However, subject to this limitation, you can repeatedly use the exclusion as long as is remains part of the tax code.
The Exclusion Amount
You can exclude up to $250,000 in gain from your income using this exclusion. This amount is doubled for married taxpayers who file joint returns.
If you don’t qualify for the exclusion or have a gain that exceeds the exclusion amount, the rest of your gain will be subject to the normal captain gains rules, which are as follows:
- If you owned the home for one year or less, it’s taxed as a short-term capital gain at the normal income tax rates. The highest tax rate is currently 37%, and a gain on the sale of your home could move you up several tax brackets.
- If you owned the home for more than one year, it’s taxed as a long-term capital gain. The capital gains rates vary from 0% to 20%, depending on your tax bracket.
Make sure you understand this important exclusion before you sell your home. Otherwise, you could face a big tax bill on the gain from the sale of your primary residence. Talk to a tax attorney if you owe back taxes on a gain from the sale of your home.
If you need help settling your back taxes, call (770) 939-7710 to schedule your consultation with one of the tax attorneys at The Gartzman Law Firm.