Are any Capital Gains owed on sale of a primary residence under $200,000 ?

Question

Henry · Answer

Hi 1Finance1, capital gains tax on a home sale is based on your profit (gain), not the total sale price. So whether or not tax is owed depends on how much you made on the sale, not simply what the home sold for.

Here's how it generally works under IRS Section 121:

1. Calculate your gain: Start with the sale price, subtract your selling expenses (commissions, closing costs, etc.) and your adjusted basis (what you originally paid for the home plus the cost of any major improvements). The result is your capital gain.

2. Apply the exclusion: If you qualify, you can generally exclude up to $250,000 of that gain from your taxable income (or up to $500,000 if you're married filing jointly). To qualify, you typically must have owned the home and lived in it as your primary residence for at least 2 of the last 5 years before the sale, and you can't have used this exclusion on another home sale within the past 2 years.

3. What's left is taxable: If your gain is less than the exclusion amount and you meet the requirements, you generally won't owe any federal capital gains tax on the sale.

You can find more details about the tax implications of selling your home in IRS Publication 523: 
 https://www.irs.gov/forms-pubs/about-publication-523

Keep in mind that some states may have their own capital gains rules, so it's worth checking your state's tax guidelines as well.