02 Dec Can I Avoid Paying Capital Gains Tax on The Sale of My Home?
Selling your home is a huge undertaking, and it comes with plenty of responsibility. It might be shocking to discover you could be responsible for paying capital gains tax!
Capital gains tax is a fee paid to the government when an investment is sold at a profit. Your home is probably one of the biggest investments you’ll make in life, and it could cost you if it’s gained value over the years.
At Mages & Price LLC, we work with home sellers across Chicagoland and understand how and when the capital gains tax will impact a client. Here, we’ll discuss how to avoid paying capital gains tax as a home seller.
The Taxpayer Relief Act of 1997
In 1997, The Taxpayer Relief Act provided the principal residence exclusion to homeowners. This is a rule set forth by the Internal Revenue Service letting you exclude up to a certain amount in capital gains tax based on marital status and other criteria.
- Single Sellers: Single home sellers may be exempt if the sale of the home is for $250,000 or less
- Married Sellers: Married home sellers may be exempt if the sale is for $500,000 or less and the gain on the sale is $250,000 or less
What does this mean? If your home is worth $250,000 more than what you bought it for, you might need to pay capital gains tax. Otherwise, you’re probably “home free” (pun intended)!
How Often Can You Be Found Exempt?
You may only be exempt from capital gains tax once every two years. You also need to be selling the home which is or was your primary residence. This is the home you’ve lived in for two years. Fortunately, there are ways to meet this requirement even if the home you sell hasn’t been your primary residence for the past two years.
The two year rule doesn’t require homeowners to live in their homes for two consecutive years. If you have lived in the home for periods aggregating two years or more out of the five years prior to the date of the sale of the home, you may be eligible for the exemption from capital gains tax on that property.
When Can’t Capital Gains Tax be Exempted?
As a home seller, you can’t be exempted from capital gains tax if:
- The home you’re selling has never been used as your primary residence
- You applied for exemption from capital gains tax within the last two years
- The home was acquired in an exchange to which Section 1031 of the Internal Revenue Code applied
If you’re still not sure whether you are legally exempt from capital gains taxes, Mages & Price LLC can help.
Contact Mages & Price LLC Today
Mages & Price LLC works with home sellers across the Chicagoland area, streamlining the sales process and protecting your investment, time, and home. We understand how stressful selling a home can be and aim to minimize anxiety and maximize profit.