Homeowners need to be aware that there’s a significant tax break available to them with the sale of their personal residence. Yet that doesn’t mean you’ll be in the clear to avoid tax on those capital gains altogether. Having a general understanding of what’s required to claim the tax break can help you plan accordingly.
Qualifying for the Capital Gains Tax Exclusion
This particular tax break applies to home sales. For individuals, the capital gains tax exclusion goes up to $250,000. Married couples can exclude $500,000. It’s a large number, but there are a few basics about the tax break to keep in mind.
To start, the exclusion is only valid for your primary residence. Typically, we’ll see that as a traditional single family residence, but condos, houseboats, and mobile homes are also valid. So long as it’s your main home, you’ll be able to apply the exclusion.
In addition, you’ll also need to have had ownership of your home for two of the past five years. After passing that “ownership test,” the last point is to pass the “residency test.” You must have lived in the home during two of the past five years, as well. However, in some cases, you might be able to access a loophole for this “five-year rule.”
Individuals required to move for work or unforeseen circumstances, such as disability, may be eligible for a partial gain exclusion. For example, if you’re helping an older family member, or you have an elderly loved one moving into assisted living, then the tax implications might not be so obvious. It’s important to make sure you aren’t missing out!
Key Factors to Consider with Your Personal Residence
It definitely pays to be aware of the interesting quirk with the ownership and residency qualifications. The trick is that you can clear them at different times. You don’t need to have had ownership and residency during the same timeframes. You might have rented before owning, then bought the property and rented the home to a family member. There are all kinds of possible scenarios. Your situation might be unique, but that doesn’t mean it isn’t valid for the tax break.
Another quirk is that you may only use the home gain exclusion once every two years. Again, that’s why it helps to plan accordingly. What’s more, you and your spouse can be treated jointly for the exclusion or even separately if you each own property. Newly married couples may have a potential tax liability to watch out for prior to selling their individual homes.
In general, the longer you live in your home, the more you can expect your capital gains to grow upon selling your property. That’s why long-term homeowners need to be careful about their potential capital gains tax problems before they get ready to list.
Need Help Organizing Your Records?
Although the home gain exclusion comes with a handful of exceptions, including foreclosure, inheritance, and partial ownership, there are plenty of times when the tax break can really pay off for homeowners getting ready to sell. If you want to make the most of your potential tax deductions, you’ll need to keep good records. The sale price of your home is only the beginning. You’ll also want to note the associated costs with selling to accurately show the gain on your property. Organizing all of your improvement costs can make a big difference with your total calculation. Plus you’ll need to make sure your original home purchase records are in order.
No matter where you’re at in the process, know that our team at NSO & Company can help you get ready for documenting your exclusions. Our tax planning services are designed to review all of the details surrounding your finances. Send us a message to let us know what’s on your mind. Or contact us to schedule a consultation. We’re always here to help!