When turmoil hits someone’s personal life, wanting to sell the home can be a common thought. In this situation, it’s important to consider the impact such a sale may have on your taxes.
Prior to 1997, taxpayers were required to reinvest home sale proceeds to avoid paying taxes on the financial gain. However, the Taxpayer Relief Act of 1997 now allows you to exclude $250,000 from the sale in you are single, and $500,000 if you file joint taxes with a spouse. The home must be your primary residence for two to five years preceding the sale.
Every two years you are allowed to exclude gains from property sales, and many homeowners take advantage of this two-year planning tool by selling rental properties.
If you find the need to sell your home before the two-year requirement, you’re still allowed to exclude a portion of the gain if you meet the exception rules. These rules include unforeseen circumstances (such as a required employment move) and selling the home because of health complications.
If you’re facing a divorce, it’s important to be aware of these exclusion issues. When one spouse moves out, both spouses can still exclude $250,000 from a future sale by way of a written agreement or court order.
The federal tax rate is 15% if you sell your home and gain more than the exclusion amount allowed. Be sure to speak with a tax advisor to understand the positive and negative tax implications of selling your home or any large asset.