About Capital Gains Tax and Selling Your House

With 2018 a full month behind us and April looming closer, it’s time to talk about everyone’s favorite subject: taxes. If you sold a home in 2018, you may be wondering how it will affect your tax return, and how to know what, if anything, you might owe. Like all tax matters, there are many rules and regulations, but figuring out the rules around home sales isn’t quite as complicated as you might think.

What is Capital Gain?

What is capital gains tax?

The simplified answer is that when you sell a house for more than you paid for it, the profit is considered your capital gain. (If you sold for less than you paid, you would have a capital loss.) The slightly longer answer starts with your adjusted basis. When you add any capital improvements you’ve made to the house (a new roof or addition) to the price you paid for your home you reach your adjusted basis. To calculate your profit you will subtract your adjusted basis from the price the home was sold for (minus any selling costs). Capital gain is considered income by the IRS and is usually taxed - but there are exclusions you can apply if you meet certain qualifications.

Ownership, Use and Timing

To know how much of the capital gain on your home’s sale can be excluded from your income taxes, there are a few requirements to look at. These requirements have to do with ownership, use and timing. If you meet all the requirements below, you qualify for a tax break.

Ownership, Use and Timing - Capital Gains Tax and Selling Your House
Ownership: You must have owned the home for at least two of the five years before it was sold.
Use: You must have used the home as your principal residence for at least two of the five years before it was sold.
Timing: You must not have used a capital gain exclusion on the same or another home within the two years before it was sold.

How Much Is the Exclusion For?

If you qualify for an exclusion on your home sale it means that up to $250,000 of the profit is considered tax-free income. If you’re married and filing jointly, the exclusion is up to $500,000, as long as at least one of you meets the ownership requirement of having owned the house for 2 of the last 5 years and you both meet the use requirement of having lived in the house for 2 of the last 5 years before it was sold..

What If I Don’t Meet the Requirements?

If you don’t meet the requirements for a tax break, your house sale profit would be taxed as capital gain at the same rate as your income tax bracket. But there are exceptions which could qualify you for a reduced exclusion. If you need to sell your house because of an unforeseen circumstance, such as poor health, divorce or change of job, part of the profit may still be tax-free.

Do I Report My House Sale on my Tax Return?

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If you have received a 1099-S form, it’s a good idea to report the sale on your tax return, even if you meet the exclusion requirements and don’t owe any taxes, as this form goes to the IRS as well. The report is typically issued by the closing agent and to avoid receiving it, you need to prove to the agent that you have met all the requirements for the exclusion.

Hopefully, we’ve helped clarify what your tax return will look like after selling a home. Many home sellers don’t end up reporting anything to the IRS, and taking a look at the ownership, use and timing tests might mean you don’t either.