When you sell your home — whether it’s a house,
co-op,
or condo — you can keep up to $500,000 in
capital gains
if you’re married and file a joint return, and $250,000 if you’re single. And if your profit is higher than these limits, you pay the favorable
long-term capital gains
tax rates on anything above and beyond your tax-free exclusion.
For example, let’s say that you bought a home 15 years ago for $100,000 that’s
worth $400,000 today. If you’re single, you’d owe taxes on $50,000 of your profit — that’s
$10,000 if your capital gains rate is 20%. If you’re married and file a joint
return, all of your profit is exempt from federal taxes because it’s under the
$500,000 limit.
Here's the rub
But as always, there are a few catches. You may still owe state taxes. And in order to qualify for the full tax break, you — and your spouse, if you’re married — must have used the home as your primary residence for at least two of the past five years.
Also, when calculating how much of your gain qualifies for the tax break, you have to include all of the profits you’ve made on the sale of previous homes that you’ve invested in your current home. For example, let’s say you sold your first home at a $100,000 profit, and invested the proceeds in your current home, which you also sell at a $100,000 profit. That means you’ve used up $200,000 of your exemption.
If you’ve owned
and lived in your home for less than the minimum of two years,
and you’re selling because of a job transfer or your
health, you may still be eligible for at least part of the
regular exclusion. In these cases, the tax exemption is pro-rated
based on how long you’ve lived in the home. For example,
let’s say you sell your home after one year because
you were relocated at your job. Since you lived in your home
half of the minimum of two years, you’d be eligible
to take 50% of the regular exemption. Be sure to consult
your tax adviser to see if you qualify for partial exclusions.
IRS publication
523 — available on the IRS Web site, www.irs.gov — has
worksheets to help you calculate the cost basis of your home.
