Home Selling: Will I Have to Pay Capital Gains Taxes?

For most people who sell a home, there is no reason to fear a huge tax bill, even if the value of your home has risen dramatically over the years. Thanks to provisions included in the 1997 Taxpayer Relief Act, a married couple can realize a $500,000 profit on a home sale and not owe a dime to the federal government. If you're single, the exemption is $250,000. It's not a one-time exemption, and you need not buy another home to qualify for it.

Specific Use Requirements

In order to qualify for the tax exclusion, the home you are selling must be primary residence, and you must have occupied it for two full years of the previous five, not necessarily consecutive. Requirements can get a bit more complicated for married couples filing joint tax returns; the residency requirement applies to both parties, but it's not always necessary to have occupied property for a full two years as husband and wife. Check with your tax adviser.

In addition, if you're newly married, home ownership (and a sale) prior to the marriage can affect present exemption status. Once again, it's wise to seek professional advice.

Profit, Not Value

In order to benefit from the tax exclusion, understand that it has little to do with the value of your home, either at purchase or at time of sale. It's the dollar value of the realized gain that determines your tax liability.

Moving Often

If, like an average American, you move every five to seven years, it's possible to take advantage of the tax exclusion every time you relocate. In fact, some owners consider it a relatively painless way to build a retirement portfolio. Like all investments, however, it bears some risks, and they don't all hinge on the ability to sell an existing home. In areas of high appreciation, it may be difficult to replace your current home with a residence that's equally affordable.

Even though a vacation home isn't eligible for the same kind of tax relief, some couples purchase a second home that they intend to pay off with the tax-free proceeds from sale of a primary residence.

Long-Term Residence

If, on the other hand, you have lived in your home for 20 or 30 years, it is entirely possible in many parts of the country that the property has appreciated more than $500,000 – especially if you live in a valuable real estate market such as Admiral's Cove. If that's the case, the first half million dollars qualifies for the tax exemption, but you would be liable for capital gains tax on any additional profit. Keep in mind that any home improvements you make over the years can be added into the "tax basis" of the home, so always keep track of those expenditures, from the day you close on your home through the date you actually sell and move out. It can make a difference!

The rate of both short and long-term capital gains tax varies, based on the actual dollar amount of gain, and also on your tax bracket, determined by income level. Currently, long-term capital gains tax is between zero and 20 percent of the the gain. So, even if your profit from a home sale is upwards of $500,000 you will actually keep most of the money.

Special Circumstances

As with most governmental regulations, there are some special rules for unforeseen circumstances, including a change of employment or medical emergency, or the sale of a home upon the death of a spouse. Active duty military service that comes with frequent changes of duty station can also be treated as a special case for capital gains tax relief under current IRS rules.

Even though there have occasionally been some rumblings about rescinding the capital gains relief provision for homeowners, it is still on the books after two decades, and is a valuable way to reduce taxes for anyone who can take advantage of it.