For many Americans home ownership is the largest investment they will make in their lives. Equally, selling a home may be the biggest sale they will ever make. Often, homeowners find themselves concerned with ramifications of the sale of their house. Once the sale is complete, there are many fees including those to banks and mortgage companies. The seller must also consider the purchase of their new home and the needed improvements, moving costs, and legal fees they will face in that transaction.
Previously, another fee a seller had to make sure they accounted for was taxes. Capital Gain Taxes are taxes owed to the government on any money made from the sale of they home. However, since the Taxpayer Relief Act of 1997, most American home owners have not had to worry about paying capital gain taxes, as long as they can meet certain requirements. Individual filers may avoid paying taxes on the first $250,000 gain from the sale of their home and those filing jointly may be able to avoid taxes on the first $500,000 gain. The main requirement to receive this valuable benefit is as follows:
You must have lived in the home being sold for at least two out of the previous five years prior to the sale.
But even if you do not meet this requirement (known as the ownership and use test,) there are ways to claim a partial gain. These circumstances include multiple births and deaths within the family, natural disasters, military service and other work-related moves. Even if you did not live in your home for at least two of the previous five years (let’s say it was a rental property) you may still receive a portion of your claim.
The capital gains tax exclusion can save you and your family a fortune. According to the United States census, the average sale price for a home in June 2014 was $331,400, while the median price was $273,500, a steep rise from just a few months earlier. All married couples who sold a home and passed the ownership and use test were able to exclude the full sale price of the average U.S. home.
The IRS defines what a home is, for the purpose of the exclusion. As many people do not live in a traditional house, it is important to know that what is considered a “home” may in fact still qualify for the exclusion. The IRS says that aside from a house, your home can be a “houseboat, mobile home, condominium or cooperative apartment.”
If you are selling a home or have recently done so, please feel free to contact by email me or call me at (401) 383-6894 and we can discuss if you qualify for this valuable exclusion and if so, how much you may benefit.