Sold Your Home for Profit? You Might Have to Pay Capital Gains Tax
The IRS states that if you have a capital gain from the sale of your main home, you can exclude “up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse.”
In general, you are eligible for the exclusion if you have owned and used your home as your primary residence for a period adding up to at least two of the five years prior to the sale. You can still qualify for the residence test without your occupancy being a single block of time, but you must meet both the ownership and residency test during the 5 years before the date of the sale. Further, you are not eligible for the exclusion if you excluded the gain from the sale of a different home during the two years prior to the sale of your primary home.
The profit you receive from the sale of a home that is not eligible for the exclusion is considered a capital gain, and taxed at the federal rates of 0%, 15% or 20% in 2021 depending on your total taxable income. While $500,000 might seem like a large enough threshold that a profitable home sale may not affect your taxable base, markets have significantly shifted over that past two years.
In 2021, the average U.S. home seller profited around $94,092, up 71% from $55,000 two years ago, per CNBC. If you have held your home for 10 or 20 years, this percentage could only go up. Say you bought your home in 1990 for around $180,000 or $200,000. That same home could potentially sell for over $700,000 today if it’s in a now-desirable area. Exceptions to the eligibility test exist for certain classes of individuals, such as those divorced or separated, widowed, those who serve in the armed forces, and others.
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