Selling Your House for a Profit? You May Qualify for an Exclusion on Capital Gains Tax
A lot of people have a false assumption they have to pay capital gains tax on their house if they make a profit on it. According to the IRS (as of January 5th, 2019), you may exclude up to $250,000 dollars of gain if you file single or up to $500,000 if you file joint with your spouse, as long as you meet their criteria which I will mention later.
That means if you buy, for example, a $250,000 house and sell it for $750,000 you can keep that gain in your pocket as long as you file joint with your spouse.
Now let’s get to the important part, the criteria.
IRS Section 121 Exclusion Criteria
You must have used the house as your main house for two of the past five years before the sale. That doesn’t mean you need to have owned it for five years, it just means you must have used it as your main home for two of the past five years before the sale date of the property.
It logically follows that you generally could not have claimed this exclusion on a different property less than two years prior to the sale date. <See IRS Publication 523>
This general rule does not apply to certain situations including government assignments (military, intelligence, etc) and they can extend that five year window out further to ten years.
How does the IRS determine your “main” home?
- US Postal Service Address
- Federal and State Tax Return Address
- Drivers License Address
They may also consider other information including:
- Where you work
- Where you bank
- You can not have acquired the property through a 1031 exchange. <See Investopedia for more information about 1031 exchanges>
- You cannot be subject to expatriate tax. This is a tax on US citizens renouncing their citizenship.
The IRS allows for partial exclusion under the following circumstances:
- Work related moves
- New work location more than 50 miles further from home
- Health related moves
- Move to take care of relative
- Move based on doctor recommendation
- Unforeseeable events
- Of owner(s)
- Birth of Two or more children
- Home Destruction
- Act of Terrorism on Property
Other Things to Remember
Even though this is a great exclusion written in the tax code, it could change! Make sure to double check the rules when you do end up selling your house for profit. Also, keep in mind that some of your closing costs in buying the property can go into the cost basis for the house – keep those records! Lastly, make sure to report the sale to the IRS – even though you may qualify for a complete exclusion.