A home is often a person’s largest financial asset. As a result, there may be large tax ramifications when a home is sold.
The first detail regarding tax consequences of selling a home is whether that home is considered your primary residence, or otherwise (second home or investment property).
If you have a gain from the sale of a primary residence, you may qualify to exclude up to $250,000 of that gain from your income. That figure extends up to $500,000 if you file a joint return with your spouse.
In order to qualify for the exclusion, you must meet both the ownership test and the use test; you must have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale.
Generally, you’re not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home. There are additional eligibility requirements, limitations, and exceptions to the two-year rule.
If the home does not qualify as your primary residence, there are completely different tax ramifications. These taxes include capital gains on the net profit of your home, along with possible depreciation recapture. Many additional factors come in to play such as offsetting passive activity losses.
The most important takeaway here is that you consider the tax implications of home sales before putting your house on the market. It’s also nice to know there are ways that allow you to be exempt from paying any taxes.
If you have questions regarding your specific situation, feel free to contact us...we’re here to help!