Thinking about selling your personal residence, but afraid about the tax you may have to pay? In most cases, you do not usually pay taxes when you sell your personal residence. If you have a gain on your home, I’m sure you are thinking: “well I have to pay tax on that!”
Not exactly.
There are exclusions of 250,000 for single filers and 500,000 for married filing joint filers. In most cases, this excludes most, if not all, of your capital gain. It seems too simple for the IRS to just exclude these large amounts, right? Yes, in order to get these exclusions you need to qualify - nothing is easy with the IRS!
There is an automatic disqualification from the exclusion if you acquired your home from a 1031 exchange in the last 5 years OR if you are a non-tax resident. There are also exceptions if you recently got separated from your spouse due to divorce or death or your previous home was destroyed or condemned, but I will leave that discussion for another time.
Yes! Partial exclusions usually occur when homeowners do not meet the Residence test due to change in employment, health issues, or other unforeseen circumstances (divorce, having twins, the death of a spouse, etc). If you fall into one of these categories then you may qualify for a partial exclusion.
How do you calculate the cost of your home?
Once you figure out your costs subtract that from the selling price. If the costs exceed the selling price you have a loss. If the selling price exceeds the costs, you have a gain!
Before you sell your home make sure to discuss it with your CPA to determine whether or not you will have to pay tax. All situations are so different! Make sure to get advice to make the best tax decision for your wallet.