How to Avoid Capital Gains Tax When Selling Your Home

If you’re planning to sell your home, you might be wondering: Will I owe taxes on the profit? The good news is that many homeowners can exclude up to $250,000 (or $500,000 for married couples) of their gain from capital gains tax under IRS Section 121.

Understanding the rules can help you maximize your tax savings and keep more of your home sale profits.

Who Qualifies for the Capital Gains Exclusion?

To take advantage of this tax break, you must meet three key criteria:

1. Ownership Requirement

You must have owned the home for at least two years during the five-year period before the sale.

2. Primary Residence Requirement

The home must have been your primary residence for at least two of the last five years. The years do not have to be consecutive, as long as they total 24 months.

3. No Recent Exclusion

You cannot have claimed this exclusion on another home sale within the last two years.

If you meet these requirements, you can exclude up to $250,000 in capital gains if you are single or $500,000 if you are married and filing jointly.

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Partial Exclusion for Unforeseen Circumstances

If you don’t meet the full requirements, you may still qualify for a partial exclusion due to:

• Job relocation (moving at least 50 miles away)
• Health reasons (a medical condition requiring the move)
• Unforeseen circumstances (divorce, natural disasters, or financial hardship)

In these cases, the IRS allows you to claim a pro-rated exclusion based on the time you lived in the home.

When Do You Owe Capital Gains Tax on a Home Sale?

Even if you qualify for the exclusion, there are situations where you may still owe taxes:

• Your profit exceeds the exclusion limit – If your gain is over $250,000 (single) or $500,000 (married), the excess is taxable.
• The home was used as a rental or business property – If you rented out the home or claimed depreciation, part of the gain may be taxable.
• You didn’t live in the home long enough – If you did not meet the two-year residency requirement, you could owe tax unless you qualify for a partial exclusion.

How to Reduce Your Taxable Gain

If your home sale exceeds the exclusion limit, consider these strategies to reduce your tax liability:

• Increase your cost basis – Home improvements (not repairs) can increase your property’s cost basis, reducing taxable gains.
• Deduct selling expenses – Real estate commissions, legal fees, and closing costs can reduce your total profit.
• Convert a rental into a primary residence – If you lived in a rental home before selling, you may qualify for a partial exclusion.

Plan Ahead to Minimize Taxes on Your Home Sale

Selling your home doesn’t have to mean a big tax bill. By understanding the IRS rules, you can take full advantage of the capital gains exclusion and avoid unnecessary taxes.

If you’re considering selling your home or need guidance on reducing your taxable gain, Whittaker CPAs is here to help. Our team can assist with tax planning, deductions, and maximizing your home sale profits.

Contact us today to schedule a consultation and make sure you keep more of your hard-earned money.