Three Simple Criteria to Qualify for a Capital Gains Tax Exemption

Learn how to exclude capital gains taxes on the sale of your home and save money.

Are you thinking about selling your home and wondering how to pay taxes after the sale of your home? Many sellers are missing out on potential savings because they don’t know they can apply for an IRS exemption. First, what is capital gains tax? This tax applies to the profits you make when selling your home. Simply put, your profit is the difference between what you paid for your home and the price you sold it for. The good news is that you can subtract certain costs from your profits. This includes all the renovations and improvements you made to the home over time, including the cost of preparing your home to sell, such as closing costs. This total is called the cost basis.

“You don’t necessarily have to pay capital gains taxes when you sell your home.”

But I have even better news. The IRS offers an exemption that allows most owners to exclude a large portion of their profits from capital gains taxes. If you are single, you can exclude $250,000 of profit; If you are married and filing jointly, you can exclude up to $500,000. To qualify for this exemption, you must meet three criteria:

1. Property. You must have owned the home for at least two years.
2. Wear. It should have been your primary residence for at least two of the last five years before you sold it.
3. Exclusion frequency. You have not used the exclusion in the last two years.

If you meet all of these requirements, you may not owe any capital gains tax. However, If your earnings exceed these limits, you could be responsible for paying taxes on the excess amount. It’s a good idea to check with your CPA or accountant to make sure you calculate your cost basis correctly and include everything allowable. I hope this information helps reduce your stress about selling your home. You don’t necessarily have to pay capital gains taxes when you sell your home. Most likely, if you meet the three criteria I mentioned above. It is a common misconception that you should move your profits next door. Instead, you can take a portion of your earnings and invest it in your next home or other things, whether it’s saving it or even planning a trip around the world.