The Tax Benefit of Selling Your Home

Selling your home can be a significant life event, not just emotionally but also financially. For many homeowners, understanding the potential tax benefits associated with selling a home can make the transaction even more rewarding. In this article, we’ll explore some of the key tax advantages that can come with selling your property.

Capital Gains Exclusion

One of the most significant tax benefits for home sellers is the capital gains exclusion. When you sell your home for more than you paid for it, the profit you make is considered a capital gain. Fortunately for sellers, the Internal Revenue Service (IRS) offers an exclusion that allows you to keep much of this gain without having to pay taxes on it.

For individuals, the IRS allows you to exclude up to $250,000 of the gain on the sale of your home if you meet certain criteria. For married couples filing jointly, this amount doubles to $500,000. To qualify for this exclusion, you must have owned the home and used it as your primary residence for at least two of the five years preceding the sale. This does not need to be consecutive years.

Reduced Tax Rates on Long-Term Capital Gains

If you’ve owned your home for more than a year, any profit that exceeds the exclusion limits is taxed as a long-term capital gain. Long-term capital gains tax rates are notably lower than the typical income tax rates, potentially saving you a considerable amount of money. As of the current tax guidelines, these rates are 0%, 15%, or 20%, depending on your overall taxable income.

Home Improvements and Selling Costs

Another way to leverage tax benefits is by keeping track of your home improvements and selling costs. When you sell your home, you can increase your home's "basis" (the original cost of your home plus any improvements you've made) by the cost of any improvements you've made over the years. This can include additions, major renovations, and other improvements that add value to your home, prolong its useful life, or adapt it to new uses.

Selling costs can also be used to reduce your taxable gain. These costs include real estate commissions, advertising costs, legal fees, and any loan charges paid by the seller.

Moving Expenses

While the Tax Cuts and Jobs Act of 2017 eliminated the moving expense deduction for most taxpayers, active duty members of the Armed Forces may still qualify. If you are in the military and your move is due to a permanent change of station, you might be able to deduct your unreimbursed moving expenses.

Special Situations

Special rules apply if you’ve inherited a home or if you’re a part of a divorced couple looking to sell a house. For inherited homes, the basis of the home is generally stepped up to the market value at the time of the previous owner's death, which could significantly reduce the capital gains tax should you decide to sell.

For divorced couples, the ex-spouse who moves out can still count the time they lived in the home towards the two-year residency requirement, as long as the home remains the primary residence of the spouse who owns it.

Conclusion

Selling your home offers more than just the opportunity to move on to new adventures—it can also provide significant tax benefits. By understanding and utilizing these benefits, you can potentially save thousands of dollars in taxes, making your home-selling experience even more profitable. Always consult with a tax professional to get the most accurate and tailored advice for your specific situation.