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Capital Gain Taxes on Real Estate

If you sold your primary home and profited you may be able to exclude that profit from your taxable income. In this article, we are going to explain exactly how this works.

$250,000 Exclusion on the Sale of a Main Home

Individuals can exclude up to $250,000 profits from selling their primary home ($500,000 for married couples) as long as they have owned and lives in the home for at least two years.

The best part is these two years do not have to be consecutive. In five years prior to selling your home, you must have resided there for at least 24 months. This rule can be used each time you sell or exchange your main home. However, you will only be able to use it once every two years.

Exceptions to the 2 out of 5 Year Rule

If you have resided in your home for fewer than 24 months, you may be able to exclude a portion of your gain. Some exceptions are allowed if you sold because your job location changed health concerns, or other unforeseen circumstances.

Job Location Responsible for Move

If you have resided in your home for less than two years, you are eligible to exclude a portion of your gain on the sale of your home if you are selling because your work location has changed.

Health Concerns

If you have to sell, your home for medical or health reasons make sure that you can document those reasons and have documentation from your physician. You will not have to file it with your tax return yet you are going to want to make sure that you keep it in your personal records in case the IRS asks to see it.

Unforeseen Circumstances

If you are selling your home because of unforeseen circumstances, make sure that you are prepared to show what the reasons are. An unforeseen circumstance is an event that could not have been anticipated before purchasing a home and occupying it.

The IRS states unforeseen circumstances as natural disasters, acts of war, change in employment/unemployment that leaves you unable to meet your basic living expenses, terrorism acts, death, divorce, separation, or multiple births from the same pregnancy.

Partial Exclusion

You can exclude a portion of your gain when selling your home after you have lived there for fewer than two years if you meet one of the exceptions that were previously discussed. This exclusion is based on the time that you resided in the home. What you are going to have to do is count the number of months that you stayed in your home and divide the number by 24.

Then, you are going to multiple that number by $250,000 (not married) or $500,000 (married). The result is going to be the amount that you can exclude from your taxable income.

For example, let us say that you resided in your home for twelve months then decided to sell because your employer asked you to relocate to a different office. You are not married so you would calculate your exclusion by dividing twelve months by twenty-four months and multiplying it by $250,000. The result is going to be $125,000. Therefore, if your gain is more than $125,000 you will be taxed on income over $125,000.

Loss on the Sale of a Home

If you lose money when selling your home, you are not able to deduct this loss.

Reporting the Gain on the Sale of Your Home

When you are reporting a gain on the sale of your home, it will be reported on Schedule D as a capital gain. If you owned your home for a year or less the gain is going to be a short-term capital gain. If you owned your home for a year or longer it is going to be reported as a long-term gain.

Calculating Your Cost Basis and Capital Gain

The formula for calculating the gain or loss involves subtracting your cost basis from your selling price. The formula for doing so is as follows below:

  • Purchase price
  • Purchase costs
  • Improvements
  • Selling costs
  • Accumulated Depreciation
  • Cost Basis

Calculating your profit or loss would be:

  • Selling price
  • Cost basis
  • Gain or loss

Lastly, to calculate your taxable gain:

  • Gain
  • Minus maximum or partial exclusion
  • Taxable gain

Remember, when you file with TurboTax Online, we’ll ask you simple questions about your situation and recommend the filing status, credits and deductions that will get you the biggest refund or least amount of tax.