Capital gains tax exclusion: Homeowners get a big tax break when they sell
One of the benefits of owning a home is tax break from Uncle Sam, such as mortgage interest and property tax deductions. Another tax benefit is when you sell: Capital gains tax exclusion. You can make up to $250,000 gain and not paying any capital gains tax when selling your home.
Not every property qualifies for the exemption, however, and there are limits on how often you can claim the benefit. Here are some facts every home seller should know about this generous tax exclusion.
The exclusion only applies to main home
Your main home or primary residence is the one you live in most of the time. Primary residence characteristics include amount of time used, place of employment, the address used for tax returns, driver’s license, car and voter registration, bills and the location of the taxpayer’s banks and so on. The tax break does not apply to a house or other property that you have solely for investment purposes.
You must own and live in the home for at least two out of the five years
You also must live in that principal residence for two of the five years before you sell it. This is known as the ownership and residency use test. The 2 years period do not have to run concurrently. You could live in the property for 18 months, move out for a year, then move back in for a further six months and still claim the home sale exclusion.
The ownership and residency tests don’t apply in “unforeseen circumstances”
Unforeseen circumstances are unpredictable events that happen at short notice and affect your ability to remain in your home. For example, serious ill-health, divorce, a family death or your job moving more than 50 miles away count as unforeseen circumstances. If you experience any of these events, you can still claim the home sale exclusion even if you sell your home before the two year qualifying period is up.
Married couples who file joint returns can deduct up to $500,000 of gain
Both spouses must live in the property for at least two out of the five years immediately preceding the sale. They do not, however, have to co-own the property — only one spouse needs to meet the two-out-of-the-last-five-years ownership test.
There is no limit on the number of time you can use the tax break
The primary residence tax exclusion is not a one-time deal. Qualifying home owners can buy a home, live in it for two years, sell the home and exclude the capital gain– then repeat the process. You can keep repeating the process as many times as you want.
Home sale losses are not tax deductible
Tax law does not allow taxpayers to deduct a home sale loss from their taxable income. If you are selling your home at loss, you cannot deduct the lost. The exclusion only apply on capital gains.
When capital gain tax being paid?
Home seller will report the capital gain tax by filing with the IRS Form 1040 Schedule D — Capital Gains and Losses. If you sell your home in 2017, you will file the 2017 Form 1040 Schedule D when filling your tax. If you have to pay the capital gain tax, it will be paid as part of your income tax filling.
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