So you finally sold your home, and now it’s time to rejoice in having a large burden removed from your shoulders. It’s even better when you’ve made a profit from the sale.
When you sell your house for more than what you originally paid, the end result is a capital gain. In most cases, capital gains are subject to taxation, however in the case of a home sale, some capital gains of up to $250,000 ($500,000 for married filing jointly) are exempt as long as the following are true:
- You owned the property for two years
- You lived in the home for at least two of the last five years prior to selling it
If you don’t meet the two requirements, you still may have some options for exemption. If any of the following reasons were cause for the home sale, the IRS will only tax a portion of your capital gain:
- Divorce or separation
- Unemployment compensation due to job loss
- A pregnancy that results in multiple births
- A natural or man-made disaster
- “involuntary conversion” from a local government
- Employment changes that affect the ability to meet basic living expenses
If you made improvements to the home, they can improve the cost basis of the home, meaning the gain you made may not exceed the $250,000 (or $500,000 if married) threshold. For example: If you bought a home for $200,000 and then made $100,000 in improvements, when you sold it for $550,000 you can deduct the entire amount of your capital gain because $550,000 – $300,000 = $250,000. Because you made the $100,000 in improvements, it raised the value of the home. Otherwise you would have been taxed on the $50,000 that exceeded the limit.