Capital Gain Exclusions on Your Home
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Capital Gain Exclusions on Your Home
To encourage home ownership, the federal government gives you a tax break when you sell your home so that you can more easily purchase your next home. Normally, when you buy an asset and later sell it for a profit, you have what is called a capital gain, and this capital gain is taxable. But with homes, you get a capital gain exclusion, meaning a certain amount of the gain is excluded from taxes.
Things To Know
- A certain amount of your gain is excluded from taxes.
- You must meet certain rules of use in order to qualify.
Currently, you may exclude up to $250,000 of your capital gain from tax. If you are a married couple filing your taxes jointly, you can shelter up to $500,000. If you are an unmarried couple who owns a home jointly and each of you meets the use test described below, you each can exclude up to $250,000.
The use test
There are rules you must meet, though. If you want to qualify for the entire exclusion, you must have owned and lived in your home for an aggregate total of at least two years of the five years before the sale. The two years do not need to be consecutive.
You can use this rule to exclude your profit each time you sell your home. Generally, you can claim this exclusion only once every two years.
Business use or rental of your home
You may qualify for an exclusion if you used your home for business or to produce rental income if you meet the ownership and use tests.
Getting a partial capital gains exclusion
If you are not eligible for the full capital gains exclusion, you may be eligible for a partial exclusion. This can happen if the reason for selling your home was due to a change in workplace location, a health-related issue, or an unforeseeable event.
IRS publication 523 discusses home selling issues in more detail, including examples for a variety of situations.