There are many instances where homeowners do not fully understand how beneficial it is to sell their homes and buy something else. When it comes time to sell the home they occupy and move on to something new, there are certain tax advantages and exclusions that are very important for homeowners to understand before they begin the selling process. Section 121 of the Internal Revenue Code can allow you to profit up to $500,000.00 if you are married and $250,000.00 if you are single, and not pay any capital gain taxes whatsoever, that is correct, no taxes.

Defining capital gains

Capital gains refer to any increase in the worth of a major property asset (vehicles, stocks, bonds, collectibles like art, and of course, homes) determined upon sale of that asset. Taxes paid during such sales are called capital gains taxes, or CGTs.

A general formula for calculating capital gain is net selling price minus net purchase price. In greater detail, this amounts to subtracting deductible closing costs, selling costs, and your property’s tax basis (sum of original purchase price, purchase expenses, costs of capital improvements, minus any depreciation, casualty losses or insurance payments) from a home’s selling price.

Capital gains exclusion

Just decades ago, the only feasible option for homeowners looking to dodge home sale taxes was to use profits to purchase a property of greater value within two years of the original sale. Tax avoidance prospects for people over 55 were even more miserable, as they were allowed only a once-per-lifetime exclusion of home sale profits up to $125,000.

The Taxpayer Relief Act marked a radical revision to CGT policy. Since May 6, 1997 home sales have enjoyed substantially relaxed standards for capital gains tax exemption; single homeowners who have lived in a primary residence for at least two of the five years prior to sale can now pay no taxes on capital gains up to $250,000, with married two-year homeowners eligible for a $500,000 CGT deduction.

Exceptions

  • Partial exemptions are possible for homeowners selling within a less than two year time frame, provided they meet certain conditions, such as illness, changes in employment status, or other unforeseen circumstances.
  • Divorced couples who meet initial occupancy requirements can still claim a $250,000 per person ($500,000 total) CGT exemption as long as one resident remains living on the property for two of five years before selling.
  • Military personnel are exempt from the two-year residency requirement if the sale is made within 10 years of original property purchase.
  • Single widows or widowers can claim a $500,000 CGT deduction for up to two years following spousal passing.

**For a full list of exceptions and other detailed info, check here.