Are There Capital Gains Taxes When you Sell a Home?

Do you Pay Taxes?

The IRS allows an exclusion on the capital gains earned on the sale of a home if you meet certain requirements.

  • You must have lived in the home for at least 2 of the last 5 years preceding the sale. This doesn’t have to be 24 months in a row. It also doesn’t have to be the immediate 2 years preceding the sale. It just needs to be a total of two years within the last five years. This means you could have lived in the house, then moved out and rented it to others and still qualify.
  • If you make less than $250,000 on the sale of the home and you are single, you can exclude it from your taxes. If you made more than 250,000, you’ll have to include any amount over the $250,000 that you made.
  • If you make less than $500,000 on the sale of the home and you are married, you can exclude it from your taxes. Just like a single person, if you make more than $500,000 on the sale, you will pay taxes on the amount that exceeds that threshold.
  • You cannot have sold a home and excluded the capital gains within the last two years.

If you’ve gone through a divorce or your spouse died, you can count the time that your spouse lived in the home as a part of the required two years.

If you were in the military, you can apply for an extension of the exclusion period. You can ask for a period of up to 10 years to satisfy the two-year requirement. This gives you a long time to fulfill the requirement while you are away doing your military service.

Asking for a Reduced Exclusion

If you don’t meet the above requirements due to circumstances outside of your control, you may be able to apply for a reduced exclusion. If you sold your house due to any of the following reasons, you may qualify:

  • You had to move due to a change in employment
  • You had to move due to a health issue
  • You had to move due to a divorce
  • You had to move due to a growing family (having multiples at birth)

The amount of the exclusion you can claim is dependent on the time you lived in the home. For example, if you lived in the home for 1 year, that is half of the time, so you can get half of the exclusion.

Knowing if You Have a Capital Gain

Now, the bigger issue is figuring out your capital gain. It’s more than figuring out the difference between the price you bought and sold the home. First, you must determine the total amount you invested in the home. This means the purchase price plus any capital investments you made in the home. Did you make any renovations that added to the value or use of the home? This doesn’t mean minor things like painting the home or repairing a burst pipe. It’s things that prolong the home’s life, such as a new roof or change its use, such as adding a room.

You will then need to deduct any of the following:

  • Depreciation
  • Losses claimed on insurance
  • Energy credits you’ve claimed