Dannielle Baugh
Dannielle Baugh
Dannielle Baugh
Dannielle Baugh
Dannielle Baugh
Selling Your Home - Are you Eligible to Exclude the Gain?

Selling Your Home - Are you Eligible to Exclude the Gain?

Are you in the market to sell your primary residence? There may be a few things you want to consider as you go through this process that might keep you from paying tax on capital gains for the sale of your home.

Selling your primary residence has the potential to be a tax-free event so long as  the sale meets certain criteria. The eligibility test determines if you qualify to exclude the gain of $250,000 as an individual or $500,000 as married filing jointly.

Step 1: Are there any automatic disqualifications? If the property was acquired in the last 5 years through a 1031 like-kind exchange, or if you are subject to expatriate tax, the capital gain exclusion does not apply to you.

Step 2: Do you meet the ownership requirements? If you owned the property for at least 24 months out of the last 5 years prior to the sale, you meet the ownership requirement.

Step 3: Do you meet the residence requirement? If you owned the property and used it as your primary residence for at least 24 months out of the previous 5 years, you meet the residence requirement.

Step 4: Do you meet the lookback requirement? This exclusion is only allowed once during a 2-year period. That is, if you did not sell another home within the last two years prior to selling your primary residence, or if you did sell a home but did not take advantage of the exclusion, you meet the lookback requirement.

Step 5: Are there any exceptions to the eligibility criteria? Exceptions do exist, such as for separated or divorced taxpayers, widowed taxpayers, military service members, intelligence workers, and Peace Corps volunteers. Other exceptions are the sale of vacant land in connection with the sale of the home, if the home was destroyed or condemned, the sale of a remaining interest in a home, or if it involved a 1031 like-kind exchange in any manner. Any of the above-mentioned exceptions would require further examination to determine if you still qualify for the capital gain exclusion, as there are additional tests to follow.

Step 6: Taking the exceptions into account, if you meet all three of the residence, ownership, and look-back requirements, you meet the eligibility criteria.

For example,  Sally bought a house 5 years ago, and lived in it the last 3 years out of the 5 years. She sells her house and makes a $175,000 gain in the process. She does not need to pay capital gains tax on her home because she is an individual and had a gain of less than $250,000 on the sale of her home.

However, if Sally sold her house and had a total gain of $275,000, she would have to pay capital gains tax on the $25,000 over the $250,000 exclusion amount.

Determining Your Cost Basis

As you sell your primary residence, certain costs can be added to the purchase price of your home, further reducing your potential gain. Hold onto the  closing statements from your purchase and sale of the property, as some closing costs and fees paid by you can be added to the cost basis. Also, keep track of any major construction and improvement costs, such as a new home built on an empty lot, bedroom additions, kitchen renovations, new HVAC systems, soft water systems, etc., as those can be added to the cost basis too. In short:

Purchase Price + Closing Costs and Fees + Capital Improvements = Cost Basis

Keep in mind that the information listed above is very straightforward and can be applied to generic situations. This does not cover more complex variables that can be applied to different situations. Whatever your situation is, or if you need assistance determining if you qualify with simple or complex scenarios and need a trusted tax advisor, gather your tax documents and create an appointment with ADKF, P.C. today, and we can help you determine if you qualify for the capital gain exclusion on the sale of your home.

is the largest, locally owned public accounting firm in San Antonio, Texas, with branch offices in Boerne and New Braunfels. We have been serving our community since 1991. We are a full-service CPA firm dedicated to providing a broad range of tax, audit, bookkeeping, tax controversy, and consulting services with superior customer service to help our clients meet their goals and objectives. Please click here to set an appointment with us.

Have Any Questions?