We are almost done with our overview of how to determine if you must pay a capital gains tax on the sale of your home. A quick recap of the last two posts: Start with what you paid for the home, then add anything that increased the value of the property and deduct anything that may have decreased the value of the property.
There is at least one more step before you know if the sale will be taxed. You may qualify for a $250,000 exclusion (or $500,000 exclusion for married couples filing jointly). If the adjusted basis is more than the exclusion, you will likely have to pay capital gains. If the exclusion is more than the adjusted basis, you probably owe nothing.To figure out if you qualify, you have to answer three questions:
To figure out if you qualify for the exclusion, you have to answer three questions:
- The ownership test: Have you owned the home for at least two years?
- The use test: Has the home been your main home for at least two years?
- Prior exclusion: During the two years immediately prior to the sale of this home, did you exclude the gain from the sale of another home?
For the full exclusion, you must answer yes to the ownership and use tests and no to the prior exclusion test. There are some exceptions to ownership and use. In some circumstances, too, you may qualify for a reduced maximum exclusion. The IRS has a long list of life events that could result in a reduced exclusion.
Again, this is a basic outline of how to figure out if you are liable for capital gains taxes on the sale of your home. There are numerous twists and turns in the tax code that could change the amount you must pay or even whether you must pay. It is these subtleties that lead us to encourage anyone who has a question about the tax consequences of selling a home to consult with an experienced tax attorney.
Source: Internal Revenue Service, “Publication 523: Selling Your Home“