Are you planning to sell your main home for more than its initial purchase price?
Have you owned your primary residence for at least two years?
If so, you may qualify for an IRS exemption that can reduce the amount of taxes you pay on the sale or exchange of your home.
Selling Your Home and the Capital Gains Tax Exemption
Whenever you have an asset that you sell for more than its initial purchase price, you have a capital gain and are usually responsible for paying taxes on the asset’s growth. However, the IRS has provided an exemption that applies to the sale of your primary residence, which states the following:
If you are a single individual, you can exclude up to $250,000 of gain on the sale or exchange of your main home.
If you are married and filing jointly, you can exclude up to $500,000 of gain on the sale or exchange of your main home.
For example, consider that you are single and purchased your home for $300,000. If you sell your residence for $600,000, you will only be required to pay a capital gains tax on $50,000 of your asset’s gain (refer to the chart pictured above).
What does the IRS define as a Primary Residence/Main Home?
For a residence to qualify as your main home, you must have owned and used it as your main home for at least two of the last five years before the date of the sale. Additionally, you cannot have claimed an exclusion for the sale of a previous home within the last two years from the date of the sale.
Remodeling Your Home May Increase Its Purchase Price and Decrease Your Taxes
Another thing to consider when selling your home is to review the improvements and remodeling you have performed on the structure since its purchase.
If you have an older home, you have likely remodeled or replaced aging infrastructure, such as new plumbing or a new roof. Such major expenditures may increase the cost basis of your house and potentially reduce the portion of your home sale that is subject to taxation. However, the IRS has specific rules that distinguish expenditures that only count as repairs from those that increase the cost basis of the home.
If you are planning to sell your main home, please consult with your tax advisor to see if you can qualify for capital gains relief before taking action. For more information, or to set up a free consultation, please contact a member of the WJA team.