A substantial portion of a home sale profit is tax-free, if you meet certain eligibility requirements. One of the chief requirements is that the home must have been your primary residence for two out of the five years before the sale – that may make the first $250,000 in profit tax free.
That number doubles to $500,000 if you are a married couple who file a joint tax return. However, as with all things involving taxes, there are details to keep in mind. One of those is the fact that tax law changes frequently, and you should always check to make sure how the latest laws impact home sales.
Pay Taxes On Primary Residence
To keep from having to pay taxes on the bulk of the profit, the home must have been your primary residence for at least two years out of the previous five years before the sale. This time does not have to be continuous, it just must add up to 24 months out of the 72 months prior to the sale. For example, if you lived in the home for eight years, then rented it out for two years and sold it, you still can qualify.
Maximum Amount and Frequency
The maximum amount you can exempt is $250,000 ($500,000 for married couples). This means you do not have to report the sale at all to the IRS, according to the agency. If you sell your home for a loss, though, you cannot take that as a tax deduction.
You can only claim the tax exemption from the profit of a home sale once every two years.
Even if you didn’t live in the home for 24 months out of the preceding 72 months, you might not have to pay taxes if:
- If you got the home in a divorce, you can count the time your former spouse spent in the home toward the two years
- If your spouse died and you haven’t remarried before the sale of the home, the time your deceased spouse spent in the home counts toward the two years
Net Investment Income Tax
Even if you meet the requirements, any amount above $250,000 must be reported to the IRS. It will be taxed through the Net Investment Income Tax, which levies a 3.8% tax on money over the limit. If you do not qualify for the exemption, then all the profit must be reported and will be subject to the Net Investment Income Tax.
If you have served in the military, foreign service or intelligence service, you may qualify to have the two-year rule suspended for up to a decade, In that case, you would qualify to have the $250,000 exempt from taxes.
These are some of the issues to keep in mind when trying to figure out if you owe taxes on your home sale. If you are like most people, the answer is likely that will not owe taxes on up to $250,000 or $500,000 (if you’re married). But keep in mind that tax law changes quickly, and you’ll want to check this again when you get ready to sell your home.