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Is Your Home a Massive Tax Liability?

July 12, 2021

Are you thinking about selling your home this year? Will you owe taxes on the sale if you do? A lot of homeowners ask this question. Rest assured that if you meet specific requirements, you could benefit from one of the biggest tax breaks out there when you sell your house. But if you don’t qualify for the exclusion, your home could become a massive tax liability.

The rules involved in the sale of a primary residence changed back in 1997, yet many people still operate under the old rules. Back then, the only option you had to exclude the gain from selling your home was to downsize. This “step down” allowed you a one-time tax exclusion.

The current rule is much more flexible than this. In fact, the IRS allows people to take advantage of a massive tax exclusion as often as once every two years, not just once in a lifetime.

Say you bought your house several years ago for $500,000, and now, with the red-hot real estate market, you’re able to sell it for $1 million. Guess what? You may not have to pay taxes on any of that! This powerful tool—along with other benefits like deducting your mortgage interest makes owning a home incredibly advantageous.

Keep in mind that you still need to report the sale of your primary residence on your tax return, but you are allowed to take the exclusion if you qualify. Here’s a breakdown of the qualifications:

  • The house must be your primary residence: Investment properties, vacation homes, and other types of real estate are not eligible for the exclusion.
  • You must have lived in the home for at least two years: Bear in mind that the years you live in your house to qualify for the tax exclusion don’t have to be consecutive. The rule states that you must live in the home for 24 months of the trailing five-year period from the sale date. However, there are many exceptions and nuances to this rule with regards to separation, divorce, military service, and more.

You experience a gain on the sale: If you sell the house as a married couple, you have the option to exclude up to $500,000 ($250,000 if you are a single person) of the gain from the sale on your tax return. Now, what exactly does “gain” mean? It’s more complex than simply subtracting the original purchase price from the selling price. Any home improvements you’ve completed over the years also add to the basis and shrildc the overall gain.

The bottom line is, be sure to watch the calendar before selling your primary residence this year. If you time it right, you could enjoy massive, tax-free income on the gain from the sale.

Still have questions? Want help with other financial decisions? If so, contact Nelson Financial Planning at 407-307-3061. As a certified financial fiduciary, we always have your best interests at heart when recommending investments, tax strategies, and more.