Selling Your Home and Capital Gains Tax

Many factors go into determining the capital gains tax rate on your home. topseller/ShutterStock

Buying a new home is exciting, but selling that same home elicits mixed emotions. Whether it’s a good move or whether life has taken a turn, the last thing you want to worry about is a capital gains tax.

But what amount qualifies for a capital gains tax? And, more important, when are you excluded from a capital gains tax?

Capital Gains Tax on Real Estate

Many factors go into determining the capital gains tax rate on your home. First, it depends on your:

• income bracket
• marital status
• how long you’ve owned the home
• whether it’s a primary residence or a secondary residence as investment property

The threshold for capital gains tax on a primary home is $250,000 for a single tax filer and $500,000 for a married couple filing jointly.

That means if you were a single filer and bought your home for $250,000 and sold it for $700,000 you would not be taxed on the original $250,000 or the second $250,000 but rather on the difference between the $500,000 and the $700,000. The capital gain would be $200,000. And you would be taxed on that $200,000.

Income and Marital Status Determines Applicable Tax Rate

Your income bracket would determine the percentage of capital gains tax you would need to pay on that $200,000.

According to the Internal Revenue Service, for 2023 and over, a capital gains rate of zero applies for any income equal to or less than $44,625 for a single filer and less than $89,250 for married couples filing jointly.

It shoots up to 15 percent for a single filer earning more than $44,625 but less or equal to $492,300.

A married couple filing jointly would be taxed 15 percent for more than $44,625, but less or equal to $553,850.

A 20 percent capital gains tax applies to taxable income more than $553,850.

If a widow(er) sells their home within two years of their spouse’s death and they haven’t remarried, they can take the $500,000 exemption. In other words, you will still be treated as a married couple and, therefore, eligible for the higher amount when selling a primary residence home.

However, to do this, neither the seller nor the late spouse took this same exclusion on another home sold within two years.

The IRS Two-in-Five-Year Rule and Investment Property

Unlike what home renovation networks will tell you, you can’t buy and immediately flip a home for a profit and expect to come under the tax exclusion for the profit amount or income.

The IRS requires you have used your home as your main residence for at least two years out of five years before its sale date. The years living in your home don’t have to be consecutive. In other words, you could live in it for one year, rent it out for three, then move back into it for another year. You will have met the rule.

You also cannot take advantage of the exception if you have already sold your primary residence (and taken advantage of the exclusion) within two years of the sale date of your current home.

The same goes for a second home. It must be your primary residence for two out of five years.

When Is the Two-in-Five-Year Rule Suspended?

Sometimes, the rule of two in five years is suspended. This could be suspended fully or at least partially.

The first, already mentioned, is a spouse’s death. But if you divorce and receive the house in the settlement, the time your former spouse spent in the house will be counted toward your living in the house.

If you become ill and have lived in your house for only one year, but have lived in a licensed care facility for an additional one year, the two in five-year period is suspended.

Other times the two in five-year rule is suspended include:

• Service, Intelligence, and Peace Corp personnel—You can suspend the two in five-year rule when on qualified extended duty. That means you could meet the two in five test even if you didn’t actually stay at home for at least two years.
• Unforeseeable events—You became unable to pay basic living expenses because of a change in employment. Your home was destroyed or condemned. You gave birth to two or more children from the same pregnancy. You became eligible for unemployment compensation.
• Work-related—You were transferred to a new job in a work location at least 50 miles farther from the home than your current work location. You had no job and started a job 50 miles from your current home. Either one is true of your spouse or co-owner of the home.

Some of these are full exclusions, and others are partial. Consult a tax expert to determine which category you fall under before filing your tax returns.

Keep Home-Improvement Receipts

The capital gains tax is determined by the original cost versus how much you sold the home for. But improvements to your home over the years are also factored into it.

Keep the receipts for any remodels, new windows, driveways, AC, etc. These can bring down your capital gains and potentially lower your tax burden.

Capital Gains Tax and Your Home

You want to earn as much as possible from selling your home. But if your income is high enough or your home value increased, you could end up paying for your good fortune.

Examine your living situation and keep your home-improvement receipts. But more importantly, consult with a tax expert to see where you stand when it comes to capital gains.

The Epoch Times copyright © 2024. The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. The Epoch Times does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. The Epoch Times holds no liability for the accuracy or timeliness of the information provided.