What is Capital Gains Tax & Exclusion on Sale of Home?

Are you selling your home soon?house for sale

If you’re thinking about capital gains taxes, you may qualify for an exclusion. Here are some of the things you need to consider when selling your home.

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Do You Pass the Ownership and Use Tests?

In order to claim the capital gains exclusion, there are a few different ownership and use tests you have to pass.

The main one is that in the five years prior to the date of sale, you must have both owned the home and lived in it for at least two years.

Capital Gains Tax Exclusion

If you sold your main home and made a profit from it, you could have the option of excluding $250,000 of the gain from your income. If you happen to file a joint return with your spouse, up to $500,000 of the total profit can be removed from your income.

If you’re excluding the entire gain, you don’t even need to mention the sale when you file your taxes.

Did You Make a Loss?

If you made a loss, you can’t deduct that loss from your income. This applies to your primary residence.

What if You Have Multiple Homes?

The capital gains exclusion only counts on your main home. You can’t exclude anything from the sales of other homes in your portfolio.

Reporting Capital Gains on Your Tax Return

If you don’t qualify to exclude the entire capital gain from your income, you must report the profit you made from selling that home when you file your tax return.

The taxable gain must be reported on your tax return if you choose not to claim the exclusion. If you received Form 1099-S, the sale must be reported, even if there’s no tax to pay on the gain.

Do You Have Mortgage Debt?

In most cases, you need to report any canceled or forgiven debts as income on your tax return. This is also necessary if you’ve experienced canceled mortgage debt, you were in foreclosure, or you went through a mortgage workout.

If you had any debt discharged after 12/31/2017, you can’t exclude it from your reported income under the principle of qualified principal residence indebtedness. The only exception is if you have a clear written agreement that states that your debt was forgiven before 01/01/2018.

Are There Any Exceptions?

Like anything in the tax world, there are a few exceptions to these rules. For example, there are exceptions if you have a disability, are a member of the Peace Corps, work for the intelligence community, or you’re a specific type of military member.

Does the IRS Offer Any Worksheets to Help?

If you want to make this easier, you should download Publication 523. You’ll be able to use this worksheet to figure out what you need to pay if anything.

Don’t worry about knowing how to file for a capital gains exclusion if you sold your house or personal property.

Online tax filing will ask you simple questions and do the calculations and fill out the correct forms based on your entries.