Thinking about selling your home? Your home is considered a capital asset, and as a homeowner, you may be concerned about paying capital gains tax if you do decide to sell. Luckily there is a tax provision known as the “Section 121 Exclusion” that can help you save on taxes following the sale of your home. Normally, you have to pay capital gains tax when you sell a capital asset for a profit. But with this exclusion, if you are married and file a joint return, you don’t have to pay tax on up to $500,000 ($250,000 for single filers) of the gain from the sale of your home.
Qualifications
Now, because this is the IRS, there are of course rules you will have to follow in order to be eligible for this exclusion. In general, there are two main areas in which you need to meet criteria. If you have owned and used your home as your main home for a period of at least two years out of the five years prior to its date of sale, you will qualify. The two years also do not have to be a single, consecutive block of time during the five year period either.
A few important things to note:
- You are only allowed to claim this deduction once every two years
- The exclusion only applies to gains from your home’s sale, not losses
- Any portion of the profit exceeding the $250,000/$500,000 limit will be subject to capital gains tax
Exceptions and Partial Eligibility
There are several exceptions to the IRS home sale exclusion rules as well. For example, if you transfer a home to a spouse or an ex-spouse, the IRS doesn’t consider that to be a gain or a loss. Additionally, other exceptions involve U.S. military service members, or where the primary home sale is a factor in separation, divorce, or death of a spouse. For more information, visit IRS Publication 523. https://www.irs.gov/publications/p523
If you don’t meet all the requirements, you still might be able to exclude a portion of your home-sale profits if you had to sell your home because of a change in your workplace location, a health issue, a divorce or some other unforeseen situation. The amount of your exclusion depends on how close you come to satisfying the ownership, live-in and previous-use-of-exclusion requirements.
Contact us: Talk with our qualified TFG CPAs for more information about this exclusion, to find out if you are eligible, how to report, and for personalized advice based on your situation. Call us at 855-542-7537.
