Does a seller need to declare all of the profit made on the sale of a home to the IRS? Homeowners should be aware of the exclusions that may make it possible to refrain from paying capital gains tax on the full or partial profit of a sale.
Learn more about the $250,000/$500,000 exclusion, partial exclusions and the 2-out-of-5-years rule.
Are You Aware of the $250,000/$500,000 Exclusion?
The exclusion applies to the sale of a main home. Up to $250,000 in profit may be excluded from the sale for individuals. As for married couples, $500,000 in profit can be excluded. The exclusion can apply to residences including a house, condo, apartment, stock-cooperative or fixed mobile home. This means that a considerable amount of the profit on the sale of a main home does not have to be reported as taxable income to the IRS. Those people who exceed these upper limits will have to report the additional amount as income. There are rules imposed on this exclusion. In order to apply for the exclusion and save money on capital gains on the sale of their Eagle Ridge home, a homeowner:
- Should have resided in the home for at least two out of five years before the sale of property. This is the 2-out-of-5-year rule. The years do not need to be consecutive.
- Can get the exclusion offered and have lived in the house for less than two years with medical documentation. It will be necessary to get a letter from a doctor is needed to document their need to sell a house for health or medical reasons.
- Document any “unforeseen circumstances” that may require the sale of a home without living there for two out of five years. Natural disasters, a change in employment, acts of war, unemployment, separation, divorce and multiple births from a single pregnancy may help a seller qualify for this exception.
These are all ways that a homeowner may be able to qualify for the $250,000/$500,000 exclusion. Even if a seller cannot get the full exclusion, they may qualify for a partial exclusion and that may allow them to keep a significant amount of money from being taxed.
How Can a Seller Qualify for a Partial Exclusion?
A homeowner who has changed work locations and has lived in the home for less than two years can exclude part of the profit from a sale from the capital gains tax. This applies to sellers who were required to move because of their current employer or have started a new job.
In addition, a seller can calculate a partial exclusion based on the time spent living in a house, divide the amount by 24 and then multiply the amount by either $250,000 for individuals or $500,000 for married couples. Remember that this amount only applies to the profit from the sale of a home. Any profit over this calculation would have to be declared and taxed accordingly.
A seller would need to declare the gain on the sale of the main home on Schedule D. It would need to be reported as a capital gain. There is a difference between reporting amounts as a short-term capital gain or a long-term capital gain. Short-term capital gains need to be stated when a seller has owned the house for a year or less. A tax accountant can address further questions about full or partial exclusions on the sale of a main home.
You May Still Need to Pay Capital Gains Taxes
Sellers of a home subject to capital gains taxes are obligated to pay the amount required from the IRS on the sale of their main home. However, first time sellers may be unaware of the exclusions above that may reduce their tax burden on any realized profits. It is important to speak with a tax accountant as requirements often change and a seller does not want to have a problem with the IRS.