Selling a house comes with its set of challenges, however, many sellers want to know if they’ll be paying taxes on the proceeds. For the most part, you don’t need to pay taxes on selling a house. In fact, many home sellers fail to report their transactions to the IRS. This article answers your questions about home sales and taxes, especially if you fall in the category of people more likely to report their home sales or you’re curious about it.
Will I Be Required To Pay Taxes on The Profits From Selling My House?
Your answer will depend on how much profit you made from the sale and how long you’ve lived in your home. If you’ve lived in your home for two to five years, you are entitled to $250,000 tax-free profit. This means that you do not have to pay tax on selling a home if your profit is $250,000 or less. If you are married and filed a joint return, you can enjoy up to $500,000 tax-free profit on your home sale. With this provision, you can safely exclude profit from your home sale (that falls within the tax-free profit bracket) from your taxable income.
This exclusion can be used every time you sell a primary residence that you’ve lived in for two to five years before the sale. You must declare the sale and include it in your taxable income if you made a profit above $250,000 as an individual or $500,000 as a couple.
Can I Qualify For A Tax Break?
Tax break qualification requires you to meet and pass three tests. The tests include;
Ownership: The property you sold must belong to you and must have been yours for the last 24 full months or two years in the past five years before the sale. For clarity, you still qualify if you lived in the property for three of five years but have rented it out in the last two years prior to the sale.
Use: The home you’re selling must have been your primary and principal residence for at least two of five years prior to sale. This means that you must be able to establish that the property had been your primary residence for at least 24 months in the last five years.
Timing of the sale: Sellers can qualify for a tax break when they haven’t excluded gains made from another property sale in the last two years. Essentially, you cannot exempt two property gains within a two-year period.
If you are married and file jointly, you can increase your tax exclusion to $500,000, thus increasing your capital gains on house sales. To qualify for the double or $500,000 tax exclusion, you must;
- File a joint tax return with your spouse.
- Meet the ownership requirement of the tax break, i.e., at least one of the partners must have owned the home for at least two years.
- Both spouses must have lived in the home and used it as a primary residence for at least two of the five years prior to the sale.
Are There Special Circumstances Where I Can Avoid Tax on Home Sale?
Home sellers who do not meet the tax exclusion requirement may also benefit from tax exclusion through special circumstances. Under special circumstances, some sellers may qualify for partial or full tax exemption. Some of the special circumstances include;
- Property acquisition as part of a divorce settlement – A person may be able to sell their home and realize tax-free gains by counting the number of years their spouse has owned the home. If the spouse has owned the home for more than two years, they qualify under the ownership requirement.
- Homeowners are allowed to count short and temporary stays in their homes as part of the requirement for tax-free profit realization. This means that occasional visits amounting to two of five years qualify the seller.
- Divorcing partners may be able to count the number of days their separated spouses spent on the property, provided the partner was granted use of the property. This means that a partner who has moved out of the property can count the other partner’s days in the property, provided the court grants their stay in it.
- Spouses with deceased partners may be able to claim time spent on the property by counting their deceased lover’s stay period. However, this provision is only available to surviving partners who have yet to remarry.
How Does Home Sale Taxes Affect Uniformed Service, Intelligence Agencies, and Foreign Service Members?
Meeting the ownership and primary residence requirement may be tough for service members, staff of intelligence agencies, and foreign service members. This is mainly because they are rarely stationed in one place for long. However, there are special modifications for this class of homeowners.
You can choose to use your 5-year test period and use suspended for up to 10 years during the period wherein you or your spouse are on a qualified official extended duty. A person is said to be on qualified extended duty when they are at a duty station no less than 50 miles away from home or reside under government orders in a government housing for 90 days or more.
With this rule, you can meet your 2-year test requirement if you have been away from home for an extended period on government orders.
Can I Qualify for a Reduced Tax Exclusion?
You may be able to enjoy partial tax exclusion if you do not meet up with the 2 of 5 years requirement. Some of the circumstances that may qualify you to sell your house for a reduced tax include;
- Home sale on account of change of employment
- Home sale due to change of health
- Home sale arising from unforeseen or financially destabilizing situations like a divorce, pregnancy, multiple births, etc.
Please note that a reduced exclusion does not mean you won’t report your profit; it only means that you’ll get a percentage exclusion level. For instance, if you got pregnant and had triplets which necessitates a bigger home, you may be able to sell your home after one year of living in it for half the single or married exclusion, that is $125,000 for single and $250,000 for married. You can learn more about taxes on properties and exclusions when you sell your home to us at Jax Nurses Buy Homes. We Buy House Jacksonville, FL and the surrounding areas. 904-201-9881