Buying or selling a home is one of the largest financial transactions you may make; like most financial transactions, there’s a tax angle. Fortunately, if you’re aware of the tax implications involved, you can factor them into your plans to help avoid any stress or surprises.
Unlike other types of capital gains, the government gives a large break if you sell your principal home for profit: up to $250,000 (or $500,000 if married filing jointly) of the profit from the sale. This break is available an unlimited number of times, and applies to houses, condominiums, apartments, stock cooperatives, or affixed mobile homes.
However, to take advantage of this break, you’re required to own and occupy the home as your principal residence for at least two years before you put it on the market. “Principal residence” means the property is your main home where you spend most of your time; you can only have one principal residence at a time. Although you must “own and occupy” the home, these don’t need to be done simultaneously.
As explained on the legal site Nolo, “As long as you have at least two years of ownership and two years of use during the five years before you sell the home, the ownership and use can occur at different times.” Renters-turned-buyers can take advantage; time renting the home prior to purchase can qualify as part of the time they occupied the property.
How to Qualify for the Married Exclusion
In order to be eligible for the larger $500,000 married exclusion, you’re required to meet all of the following conditions:
- You’re married and file a joint return for the year
- Either you or your spouse meets the ownership requirement
- Both spouses meet the usage requirement
- Neither spouse excluded gain from the sale of another home during the two-year period ending on the date of sale
What if your spouse is deceased? You can still claim the $500,000 exclusion if the following conditions are met:
- You sell your home within two years of your spouse’s death
- You aren’t remarried at the time of the sale
- Neither you nor your deceased spouse took an exclusion on another home sold less than two years before the date of the current home sale
- You meet both the ownership and residency requirements (this may include your late spouse’s ownership and residency times)
How to Receive Improvement Breaks
If you’re single and purchase a home for $300,000, you’re limited to a sale later of $550,000 before you’re required to start paying taxes. If you make any improvements to the home, they will increase the $300,000 basis. What’s considered an “improvement” by the IRS? Many things, including adding on a new room, installing a new heating system, landscaping, new siding, or even a satellite dish.
However, general repairs, like fixing a broken window, don’t count as an improvement and won’t add to the basis. If fixing the window is part of a larger renovation project, it will count as an improvement.
As you can see, there are many rules surrounding the tax implications for selling a home and some of them can become confusing (i.e. what’s considered an improvement vs. a repair). If you’re planning to sell your home in the near future, contact one of our real estate tax professionals to make sure your plans align with the current tax rules.