If you sell any capital asset, including your primary home, for a profit, you have a capital gain. This means your property sold for an amount higher than the original purchase price, allowing you to come out ahead.
Usually, capital gains are subject to taxation. This impacts the amount you on your federal income taxes. However, the sale of your principal residence may qualify for a capital gains exemption. Mean you could to avoid owing money to the IRS.
Eligibility Capital Gains Exemptions on Your Primary Home
Qualifying for capital gains exemptions means meeting specific criteria. First, you’ll need to have owned the house for a minimum of two years during the five-year period before the sale. This can be a continuous 24-month period or a series of smaller periods that total up to two years.
For example, if you plan to sell your home in February 2019, if you purchase it in January 2017 and maintained possession the entire time, you meet the first criteria. Similarly, if you bought the house in January 2014, transferred ownership in January 2015, then became the owner again in January 2018, finally selling in February 2019, you may also qualify.
The second requirement involves using the property as your primary residence. Again, the minimum length of time is two years during the previous five years. The house must also have been used as your principal home.
Finally, you must not have had capital gains exemptions on the sale of a home during the two years prior to this sale.
Other Instances Where You May Qualify
In most cases, if you meet the criteria above, you qualify for an exemption. However, there are instances where not meeting the requirements doesn’t preclude you from the capital gains exemption.
For instance, a suspension of the five-year test period is available to certain government and military personnel. Usually, this involves either being assigned a duty station 50 miles or further away from your primary home or residing in government housing on government orders. Additionally, you must be on official extended duty at that location for over 90 days or for an indefinite amount of time.
In another example, widows and widowers may be able to count the amount of time their deceased spouse resided in the home before the sale if they themselves were not a resident for at least two years. Additional conditions do apply, such as selling the property within two years after the spouse’s passing and not being remarried, so you’ll need to review your situation to see if you are eligible.
Partial Capital Gains Exclusions
If you don’t meet the requirements for a full capital gains exemption, you may still qualify for a partial exclusion. Usually, this is available to individuals who sell a home due to a health issue, change in workplace location, or specific unforeseeable events.
For example, moving to obtain certain kinds of medical care may make you eligible. If a doctor recommends a change in residence due to a health issue, that may also qualify. Additionally, relocating to provide medical or personal care for a qualifying relative who is ill or injured may allow you to take a partial capital gains exemption.
A formal job transfer that is a minimum of 50 miles further away from your home than your previous worksite is one way to become eligible. Relocating to find a job because no suitable work was available within a 50 miles radius is another.
Unforeseeable events, including deaths, divorces, becoming unemployed, or change in employment status, may also qualify you for a partial capital gains exemption.
How Large is the Capital Gains Exemption?
The amount you can count as a capital gains exemption varies depending on your tax situation. If you qualify and file as single on your tax return, you can exclude up to $250,000. If you are married filing jointly, then the exemption can reach up to $500,000.
Any capital gain above the exemption is typically taxable. Additionally, those who qualify for a partial capital gains exemption will only be able to exclude a lower amount, which can vary depending on your circumstances.
Do You Have to Report the Sale to the IRS?
Regardless of whether you qualify for a capital gains exemption, you might still have to report the sale to the IRS. Typically, anyone who receives a Form 1099-S, Proceeds from Real Estate Transactions, you are responsible for reporting the sale.
Additionally, you have to report the sale if not all of the capital gain is excludable. Any excess capital gains likely count as income, so you have to include relevant details when you file your taxes.
IRS Publication 523 covers the rules regarding the reporting of the sale in various circumstances, ensuring you proceed appropriately according to your unique situation.
How Can I Be Sure That I Qualify?
If you want to make sure that you are eligible for capital gains exemptions on the sale of your principal residence, review the IRS documentation regarding the requirements. You can also do a basic IRS eligibility test to make sure you aren’t automatically disqualified. Everyone’s situation varies, so it’s important to go over the details yourself.
If you want to determine if you have taxable gain, you can use an IRS worksheet to complete the calculations. It’s a multistep process and requires a substantial amount of details regarding your property, length of ownership, and similar factors. However, it is incredibly useful if you want to review the information yourself.
Seek Professional Advice
Alternatively, you can speak with a financial or tax professional with knowledge of capital gains exemptions. They can assist you in reviewing your eligibility and helping with the calculations.
It’s important to note that the IRS makes the final call regarding your eligibility. If you have any unanswered questions regarding the qualifications, you can reach out to the IRS. They may be able to clarify the rules. This makes it easier for you to determine if you qualify. However, they typically cannot provide tax advice or direct confirmation that you meet the requirements. Only consider them a potential source of information regarding the rules and nothing more.
Have you ever claimed capital gains exemptions on the sale of a home? Tell us about your experience in the comments below.
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