Do I Have to Pay Capital Gains Tax on My House?

Hello Hampton Roads,

Have you ever wondered, "Do I have to pay capital gains tax on my house?"

When referring to real estate, capital gains tax is the tax paid on capital gains, which is the net profit one makes from the sale of a house.  If you are fortunate enough to make a profit, you may not necessarily have to pay capital gains tax on your house.

According to IRS Publication 523: Selling Your Home (from the website, here are the rules for exclusion basis:

For single individuals, you can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true:

  1. Owned the home for at least 2 years (ownership test)
  2. Lived in the home as your main home or at least 2 year (use test)
  3. During the 2-year period ending on the date of the sale, you did not exlcude the gain from the sale of another home.
Exception: If you owned and lived in the property as your main home for less than 2 years, you can still claim exclusion in some cases (eg. individual disability, previous home is destroyed etc). However, the maximum amount you may be able to exclude will be reduced.

For married persons, the exclusion can be up to $500,000 that is $250,000 for you and your spouse if  a joint tax return for the year of sale is filed and one spouse meets the ownership and use tests. In order to qualify for the capital gains tax exclusion, the following must be true:
  1. You are married and file a joint tax return for the year
  2. Either you or your spouse owned the home for at least 2 years (ownership test)
  3. Both you and your spouse lived in the home as your primary residence for at least 2 years (use test)
If you don't meet all the home sale exclusion tests, there are still certain circumstances where you still can acquire a tax break. Some of the reasons are as follows:

  • You may be able to get a reduced exclusion when you need to sell your home due to a change in health condition or a long distance relocation because of change in employment or unforeseen circumstances. If this applies to you, you would calculate the exclusion based on the time you lived in the home.  For example if you were in the home for half the time and were relocated to another state you would be able to claim 12 out of the 24 months of exclusion or half the amount of the exclusion ($125,000). 
  • There is also a special provision for people in the armed forces. The law instituted in 2003 now exempts military personnel from the two-year use requirement for up to 10 years, letting you qualify for the full exclusion whenever you must move to fulfill your service commitments.

If you have capital gain that cannot be excluded, it is automatically taxable. This should be reported on Schedule D or Form 1040. But if you are able can exclude all of the gain then you do not need to report the sale on your tax return.

Otherwise, you can also opt not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. This choice can be completed or cancelled before the expiration of a 3-year period beginning on the due date of your return for the year of the sale.

You refer to IRS Publication 523: Selling Your Home for specific explanations and examples and you may use its worksheet 2 to figure the amount of your exclusion and your taxable gain, if any.

This post is general information only and not intended as tax advice. The best thing to do is to consult your own tax advisor about your specific situation.

Thanks for Reading,
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