I have had a lot of inquiries lately about taxes due on the sale of a personal home as many homeowners still think old tax laws are in effect. Things have gotten a lot easier in excluding any gain on the sale of a personal home but let’s start with what the old law was.
OLD Tax law: If you sold your personal home at a gain, to escape tax on capital gains the proceeds of the sale had to be rolled over into the purchase of another home. Individuals over 55 were allowed a once-in-a-lifetime exclusion of $125,000 from capital gains on the sale of their home.
NEW Tax law (as of 5/6/97 yes that’s 1997): If you lived in the home as your primary residence and owned it 2 out of the last 5 years, you are eligible for a $250,000 (single/MFS/HoH) or $500,000 (MFJ) exclusion from capital gains tax. If you lived in the home less than 2 years, some exceptions to the rule might apply to allow a pro-rated exclusion: move due to change of job, health, or unforeseen circumstances such as divorce. If you depreciated the home due to renting it out or claimed depreciation in the home office deduction, that amount will need to be “recaptured” and taxed at rates up to 25% (this is technically a section 1250 gain, not capital). Another caveat is you cannot claim the exclusion more than once every two years.
That’s it in a nutshell for selling your house without having to cough up money on the gain to the government. As with any tax law, if your situation is a little more complex than described above, please contact a tax professional.