Basic Tax Consequences of Selling Your Home

What is the exclusion? If you sell your home, you may exclude a specific amount of your capital gain from tax.

What is the amount of exclusion? Married couples filing jointly may exclude up to $500,000. Unmarried people who jointly own a home and who each meet the Ownership and Use Test may each exclude up to $250,000.

What is the Ownership and Use Test? You must own and live in the home as your principal residence a total of 2 years of the 5 years before the sale.

What are the calculations? (Home selling price) – ((deductible closing costs) + (selling costs) + (tax basis in the property)) = Capital Gain

Tax Basis = ((original purchase price) + (purchase expenses) + (cost of capital improvements)) – ((depreciation) + (casualty losses or insurance payments))

What are deductible closing costs? These include your share of prorated property taxes and points or prepaid interest on your mortgage.

What are selling costs? These include legal fees, administrative costs, advertising costs, escrow fees, inspection fees, real estate broker’s commissions and title insurance.

Can you qualify for a partial exclusion if you do not qualify for the full exclusion? If you do not meet the Ownership and Use Test, you may still qualify for a partial exclusion if you sell your home due to a significant detrimental change in family, e.g, divorce, legal separation, multiple births from a single pregnancy, or in your place of employment, or health circumstances.

What is the requirement for married couples filing jointly? The married couple may exclude up to $500,000 if (1) either spouse owned the residence, (2) both spouses meet the Use Test, and (3) neither spouse has sold a residence within the last 2 years.

How are separate residences treated? In a new marriage where one spouse sold a residence within 2 years before marriage and is thereby disqualified, the other spouse may exclude up to $250,000 gain on a residence owned before marriage.

Note well:  The above basics are NOT meant to be exhaustive and should not be relied on as legal advice. You should always contact a tax professional for tax advice related to your specific circumstances.