Do I Have to Pay Capital Gains Tax on My House

The Internal Revenue Service wants a part of your profits on the sale of your home. But how much is "a part?"

People who are single can exclude up to $250,000 in capital gains when selling their homes, while married couples can exclude up to $500,000. This means that you will not be hit with a home sales tax when you sell your home if you have fulfilled certain requirements.

Even better, you might be able to sell a home every two years and take these exclusions.

Exclusion requirements
The Internal Revenue Service will allow you to exclude up to $250,000 if you are single and $500,000 if you are married and have used your home as a primary residence for at least two out of the last five years. Residency does not have to be consecutive as long as you fulfill the two-year requirement.

Married couples have a few additional requirements. Couples must have filed a joint tax return the year that they sell their home. Only one of the spouses has to have owned the home for two out of the previous five years, but both spouses must have lived in the home for at least two years in order for both spouses to qualify for the exception. Neither spouse can take advantage of the exclusions on home-sale profits during the two years before selling the home in question.

If you own a home with someone else, each of you may take a $250.000 exclusion as long as both of your names appear on the mortgage.

Multiple-home owners
If you own more than one home, the Internal Revenue Service has a set of requirements that you must fulfill in order for a home to be considered a primary residence. The IRS says that a home's address must be used for state and federal tax filings, car registrations, drivers' licenses and voter registration. Other IRS requirements may include being locally employed and banking near the home.

Calculating home profit
Calculating the capital gains on your home can be a little confusing. First you take the selling price and subtract your selling expenses. So if you sold your home for $500,000, paid your realtor a $23,600 commission and had other selling-related costs of $4,000, you would be left with $472,400. If you originally bought your home for $125,000 and had $8,000 in closing fees, then $133,000 would be the basis for calculating your profit. In this example, your profits would be $472,400 - $133,000, for a total of $339,400.

What if you have added on to your home? If you spent $65,000 on a room addition, the $65,000 would be added to the dollar amount that you calculated as your basis for owning the home. Continuing the example above, it would be added to the $133,000 for a total of $198,000. In this case, your profit would be $274,400.

Other factors that can affect the profit from a home sale include any rent that you might have received or if you deducted a home office on your taxes.

Planning
Make sure that you understand how much of your home's profits will be taxable before selling your home. If you have more than one home, keep in mind the implications of selling your primary residence in relation to gains that you might be able to exclude from the sale of another property and plan accordingly. It is always wise to consult an expert if you have any concerns about paying taxes on your home's sale.

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