Consider capital gains tax on home sale

Be proactive and understand how taxes and capital gains may be impacted when selling a home.

Woman considers capital gains on her home sale.

Are you thinking about selling your home?

As you consider your options, make sure you include the tax implications in your evaluation process. If the sale of your house results in a capital gain (the excess of the amount realized over the adjusted basis of the property), you may be subject to a capital gains tax when you file taxes.

What is a capital gain?

Little improvement projects could give you big returns but it's important to also consider how selling your home impacts your taxes. According to Investopedia, a capital gain is a rise in the value of a capital asset (property, investment or real estate) that gives it a higher worth when sold than what is was originally purchased for. This may impact your taxable income on your tax returns.

What is a capital loss?

Capital gains can be reduced by deducting the capital losses that occur when a taxable asset is sold for less than the original purchase price.

Are there exclusions from capital gain tax?

There are scenarios that allow the sale of property and prevent a capital gains tax. There are, however, some restrictions on this. Here are a few things to consider:

  • Filing status and income: Based on the Taxpayer Relief Act of 1997, if you're single, you'll pay no capital gains tax on the first $250,000 you make when you sell your home. Married couples enjoy a $500,000 exemption. There are, some restrictions on this exemption.
  • Capital losses: Capital gains can be reduced by deducting the capital losses that occur when a taxable asset is sold for less than the original purchase price of the property. As an example, if a homeowner bought a house for $250,000 and sold the house five years later for $200,000, then there is a capital loss of $50,000.
  • Length of time of ownership: Generally, you must have owned and used the home as your main residence and lived in the property for at least 24 months during the previous five years leading up to the date of sale.
    • The 24 months do not need to be continuous or in a single block of time.
    • Only one spouse has to meet the ownership requirement.

To mitigate tax consequences, you should consider if you meet the requirements of the exclusion, including if you pass both the "ownership" and "use" tests before you sell your home. If you currently do not pass one or both of the tests, you may want to consider delaying the sale of your home until you do. For additional information, you may want to reference IRS Tax Publication 523, "Does your home sale qualify for the exclusion of gain" to determine the maximum dollar limit you can exclude and for additional rules, explanations, examples and worksheets.

Neither State Farm nor its agents provide tax or legal advice.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.

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