Taxation on the Sale of a Home

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For most of us, our home represents our largest asset. Over time, the management of this asset can make a big difference in our overall financial outlook. One of the largest planning opportunities home ownership brings is the favorable tax treatment afforded the sale of a primary residence.

Home Sale as Capital Gain

The gain on the sale of a home is considered a gain on the sale of a capital asset. There are both short-term capital gains and long-term gains. Short term gains are gains on investments (i.e. home) which are sold after owning for less than a year. The gains on these investment are taxed as regular income. Long-term capital gains are on assets that you own for longer than a year. Under the 2018 tax law, long-term gains are taxed at 0%, 15% and 20% depending on your income. Gain on the sale of a home may only be taxable to the extent it exceeds $250,000 ($500,000 for joint filers). Because most people own their homes for over a year, it is important to understand long-term gains and the expulsions that exist for tax purposes.

When determining your capital gains price subtract the cost you bought for your home from the price your home sold for. Also deduct any costs associated with remodeling or other improvements made to the home. You can also adjust the amount for any fees associated with a real estate commission, closing fees or legal fees you agreed to or were required to pay. This is roughly how you will account for the capital gains which will help to determine the tax.

The Primary Residence Exclusion

A $250,000 exclusion for single filers ($500,000 for joint filers) is now available to all taxpayers. You can claim the exclusion once every 2 years. To be eligible, you must have owned the residence and occupied it as a principal residence for at least 2 of the 5 years before the sale or exchange. If you fail to meet these requirements by reason of a change in place of employment, health, or other unforeseen circumstances you can exclude the fraction of the $250,000 ($500,000 if married filing a joint return) equal to the fraction of 2 years that these requirements are met.

Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon when coordinated with individual professional advice.