Selling your home? Section 121 advice
Selling your home can be tough. It can be confusing too? Section 121 advice below…
Do I owe tax on the sale of my home?
May 30th, 2022
Home prices continue to reach record highs. As of March 31, 2022, home prices were up 13.5% from the previous year and 26.5% compared to March of 20201. This has led many families to wonder whether the sale of their home will be subject to taxes should they decide to take advantage of rising home values.
Generally, a homeowner can exclude $250,000 of gain or $500,000 (if filing a joint tax return) of gain on the sale of their home. However, there are certain requirements to take advantage of these tax free rules. The homeowner will need to meet both the ownership test and the use test.
The ownership and use tests simply state that the homeowner needs to have owned and used the home as a primary residence for at least 2 of the last 5 years (they do not have to be consecutive years).
- For a married couple, either spouse may satisfy the ownership test but BOTH spouses must meet the use test.
- You and your spouse buy a home in 2018 for $250,000 and decide to sell it in 2022 for $600,000.
- You have a gain of $350,000 ($600,000 – $250,000).
- The entire $350,000 is tax-free. This is because couples that file Married, Filing Jointly may exclude up to $500,000 in gains assuming they have owned and used the home for at least 2 of the last 5 years. In this case, the property was owned and used for 4 years.
What else should I know?
The exclusion of gains on a personal residence (up to $250,000 or $500,000 spending on tax filing status) is available to be used every 2 years; currently, there is no limit to the amount of times this can be used in a lifetime. Additionally, individuals may be eligible for a limited amount of exclusion if they’re required to sell their home and relocate before meeting the 2 year ownership and use requirement in certain situations (i.e health reasons or other unforeseen circumstances).
Additionally – there is no requirement you use the funds to purchase another home. Want to talk more – reach out (email@example.com)
What about vacation or rental properties?
Unfortunately, vacation and rental properties are not eligible for tax-free gains. However, you may choose to move into a rental property and convert it to your new personal residence. In this case, if you later choose to sell the home, a portion of the gains may be excluded assuming you live in the property at least 2 years. The amount of exclusion will ultimately depend on the amount of time you used the property as a personal residence.
Additionally, the amount of exclusion will not be as straightforward as a normal personal residence as discussed above because you must allocate the exclusion between non-qualified use (i.e rental use) and personal use.
This article is an offering of expert advice by BBK Wealth Management. For more information please reach out to firstname.lastname@example.org.