Surprise! The Gain on the Sale of Your Home May Be Taxable

Since 1998, most people haven't had to worry about owing taxes when they sell their home, even if they clear a hefty profit when they do so. There's no longer any need to buy another house to roll over any gain, and in many cases the taxpayers don't even have to report the sale of their homes on their tax returns.

You can still owe tax on some or all of the gain from the sale of your home, however. Tax will be due if one or more of the following are true.

1. You didn't own and live in the house for two of the last five years
If you sell your home at a gain before two years are up and you don't qualify for any of the exceptions, you pay tax on the gain.

Exceptions: If you have to move because of health, a job transfer, or other unforeseen circumstances, you may still be able to exclude your gain. The maximum amount you can exclude will be prorated.

For example, let's say you were single and you owned and lived in a house for one year before you were transferred by your employer to another state. You met the requirements for 50% of the two-year time period. You can exclude up to $125,000 of gain from the sale ($250,000 times 50%.)

2. The house appreciated in value when you were not living in it
Prior to 2008, you could have a vacation or investment home for years -- decades, even -- and watch it go up in value. So long as you moved into it for two years before you sold it, you could exclude up to the maximum amount of gain. That loophole has been closed. You cannot exclude gain from while you were not living in the house. For this purpose, the house is assumed to have gone up in value the same amount every year while you owned it.

3. The house went up in value more than the exclusion amount
It's not far-fetched, especially in some parts of the country. The amount of gain you can exclude from the sale of a home is $250,000 ($500,000 if filing jointly). A home can go up in value more than $250,000, or $500,000 if you are filing jointly. You'll pay tax on the gain over that amount.

4. It wasn't your main residence
The rules for excluding gain on the sale of your home only apply to your main residence. If you have a second home or any other home or investment property, you may owe capital-gains tax when you sell.

5. You or your spouse already took an exclusion within the last two years
You can't take this deduction more often than once every two years. This rule can catch people unawares, especially if one spouse sold a home before they got married. In that case, you'll want to wait until two years after the sale before you sell another house at a gain.

Excluding a gain on the sale of a home is still one of the best deals in the tax code -- when you meet the requirements. Make sure you stay within the rules, if possible, to avoid any surprise gain when you file your return.

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Read/Post Comments (7) | Recommend This Article (10)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 09, 2014, at 5:50 PM, vet212 wrote:

    Not might be IS, like all capital gains which this is , it is fully taxable by the IRS

  • Report this Comment On February 09, 2014, at 8:42 PM, RealAmerican wrote:

    I am really tired of reading about what supposedly constitutes a "loophole," especially when it is stated in a context as though holding on to your hard earned money is somehow unfair. I guess any legal or regulatory justification for not paying even more to a government that spends all it gets and even more (often just to buy votes) is a "loophole." The entire taxation scheme is a control apparatus for bennies to buddies (and donees) and harm to those who can be harmed with impunity. There is little credibility, if supposed "fairness" is the objective.

  • Report this Comment On February 09, 2014, at 11:50 PM, ammiey wrote:

    glad i rent

  • Report this Comment On February 10, 2014, at 2:19 PM, Scottilla wrote:

    To Vet212: if it was your primary residence and you lived there for more than 2 of the last 5 years, the first $250,000 (single) or $500,000 (joint) of profit is NOT taxable.

    To Ammiey: You're missing out on $250,000 (single) or $500,000 (joint) of tax free income.

  • Report this Comment On February 10, 2014, at 2:50 PM, Demint wrote:

    Not taxation, confiscation is the word. WHEN will Americans have enough of this?

  • Report this Comment On February 11, 2014, at 7:47 AM, Sneakrs wrote:

    What happens when you purchase your house for $85k, $30k upgrades. Move. Rent it for 5 years and end up selling for $60k because the market is so bad. Do you get a tax break or do they still consider it capital gains? Haven't sold it yet but...just wondering.

  • Report this Comment On February 11, 2014, at 9:45 AM, julianblock wrote:

    A detailed discussion of the rules for home sales is in "Julian Block's Home Seller's Guide to Tax Savings," available as a Kindle on Amazon and as a print copy at julianblocktaxexpert.com.

    Below is a recent review.

    Julian Block’s Home Seller’s Guide to Tax Savings

    Law professor James Edward Maule of Villanova University blogs on taxes. Below are his takes on the book.

    Revised Edition of Book on Taxation of Residence Sales: Still Risky to Leave Home Without It

    Almost five years ago, I reviewed Julian Block’s “HOME SELLER’S GUIDE TO TAX SAVINGS.” I concluded that it was “useful,” “solid, well-organized,” and a book that “every real estate agent and broker in the country who handles residential home transactions ought to acquire

    The new version is no less useful, no less well-organized, and no less informative. Julian continues to provide numerous examples, and to delve into “almost every possible variation on the home sale theme” as he did the first time around. He continues to focus on the issues specifically affecting surviving spouses, divorced and unmarried individuals, unmarried couples, owners of condominiums and cooperatives, and those who have used part of their residence as an office in home, to mention some of those to whose problems he gives attention. The checklists in the book have been retained and updated to reflect developments in the tax law. The discussion of record retention remains no less important than it was five years ago.

    At a time when taxpayers are realizing losses on the disposition of residences because of the housing market collapse, Julian chapter on when losses can and cannot be deducted is especially timely. No less important is the chapter that deals with insolvency, foreclosures, and debt cancellation. There are chapters on casualty losses, home improvements in the form of medical expenses, and the mortgage interest deduction, though again Julian leaves the details of other home-related tax issues, such as real estate tax deductions and the computation of depreciation for home offices, to other books. That makes sense considering the basic theme of the book is residence sales.

    There continues to be all sorts of misinformation circulating on the Internet and among home sellers, and there accordingly continues to be a need for Julian’s book. My suggestion five years ago that real estate agents and brokers get themselves a copy is no less valid today than it was then. The numbers of people selling homes without using realtors continues to increase, and they, too, would benefit from having a copy of Julian’s book.

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