Capital Gains on Home Sales

A home is a capital asset, this means you can owe capital gains on home sales. In this article, we will go over what capital gains tax is, and how you can avoid it.

How It Works

If you sell a home for profit, you will owe capital gains tax on that profit. For example, if you bought a home for $250,000 and sold it for $300,000 you could potentially owe capital gains on the $50,000 profit. Capital gains tax is assessed as follows:

Types of Homes

Your home can either be a residence or a vacation/investment property. To be a residence you must meet the 2 in 5 year rule. This means in the previous 5 years you must have lived in a home for a total of 2 years, or 730 days. These do not need to be consecutive. On the other hand, a rental/investment home was a purchase made or repurposed to generate a profit or income. These properties can be defined as a second home if you use it for 14 days during the year, or 10% of the number of days you rent it out. Whichever is greater.

Capital Gains Exclusions

You can exclude some capital gains thanks to the Taxpayer Relief Act of 1997. With this law you can exclude up to $250,000 of capital gains if you are single or $500,000 if you are a couple. To do this you must meet the 2 in 5 rule. If you are claiming the exemption as a couple, both spouses must meet the residence requirement, even if the property is only in the name of one spouse.

Selling Your Home

If you claim a home as your residence for 2 out of the last 5 years you can claim a $250,000 (single) or $500,000 (married) exclusion of capital gains on home sales. If you claim a home as an investment/rental property you will have to pay capital gains tax on the home sale proceeds.

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