Now that properties have been flying off the market for nearly 2 years, and home prices have been on the rise, many homeowners might be anxious to sell and get the money out of their homes.
But wait – what about those good ol’ capital gains? Remember those capital gains that no one has been thinking about for several years as the real estate market took its nose dive in values? Well now we have entered a new era, homes have been appreciating and capital gains taxes could put a dent in rising home values.
Your “Main Home” and Capital Gains Taxes
Have you lived in your “main home” for less than two years? If you have lived there for less than 2 years you will be liable to pay capital gains taxes. However, if you have lived in your home for at least two years out of its five years prior to the date of sale, you may be able to exclude up to $250,000 of your gain from the sale if you are filing their taxes individually, or $500,000 when filing a joint return.
The IRS defines a “main home” as the one the person lives in most of the time. The two-year period required to live in it while owning it to get the capital gains exclusion does not have to be continuous.
What to Do When it’s Time to Sell Your House
A seller can also avoid capital gains taxes when selling their home when these conditions exist:
- If the seller owned or lived in a primary home for a total of at least one year and became physically or mentally disabled and could not care for themselves. The time that they live in a facility licensed to care for people with that disability can count as time lived in their primary home. They must still own the home for at least two years.
- If the seller’s previous home was destroyed or condemned they can avoid capital gains tax when selling their replacement home if the ownership and use of the combined homes meet the two-out-of-five-year exclusion.
- If the seller or their spouse are on qualified official extended duty in the Uniformed Services, the Foreign Service, or the intelligence community, they may elect to suspend the five-year test period for up to 10 years.
A seller should check IRS Publication 523, Selling Your Home, to get all of the information they’ll need to make an informed decision.
Knowing the tax implications may make a difference in how many dollars the seller actually walks away with in a sale. Maybe the seller will need to wait another month or two before putting up the “For Sale” sign so you can save thousands on capital gains taxes.
Always when dealing with tax issues, we recommend seeking the services of a professional tax professional.
If it is time to sell your home, contact us at Benjamin Realty — we’d love to talk with you.