Will You Have To Pay Tax On The Sale Of Your Home?
When you consider that real estate agencies take an average of 7% of the money when you sell your home, you would be forgiven for asking questions about the level of tax you also have to pay. It seems as if we are getting taxed for just about everything else so it’s no surprise when people fear the worst. However, you will be delighted to know that it’s extremely unlikely that you will be forced to pay any tax on your home whatsoever.
Tax Exemptions
As long as you make less than $250,000 profit on the sale of your home and haven’t recently purchased it, you will be completely exempt from tax. If a married couple sell the home, this figure rises to a whopping $500,000. There are a few IRS requirements however. These include owning the home for at least two years and showing proof that you have lived in the house for at least two of the last five years. You can only benefit from this tax exemption if you haven’t already done so in the previous 24 months. This means that you can’t sell two homes in the space of two years and have tax free profits from both.
Exceptions
If you’re selling your home inside two years, you will be subject to taxation but there are exceptions to this rule also. For example, you will be entitled to the a tax exemption if you were forced to sell your home because the location of your job changed, if health reasons caused you to move or other unforeseen circumstances. In the event that your home is being sold for medical reasons, be sure to keep a physician’s letter with you. Although you don’t need to file the letter with your tax returns, there is the possibility that the IRS will seek this information when they are looking for additional documents.
The IRS have their own definition of what constitutes unforeseen circumstances. In their eyes, it means that an event occurred during your time in the home that you couldn’t possibly have accounted for when you purchased it. They even have a list of specific examples which includes death, divorce, employment change that decreased your income and made you miss important bill payments, multiple births in a single pregnancy or acts of war/terrorism.
Partial Exemption
If you have lived in your home for less than two years but meet one of the exceptions above, you’re entitled to partial exclusion. Essentially, the amount of time you lived in the home is recorded and a tax exemption is calculated from that. So if you lived in the home for just six months before selling it, you are entitled to one quarter the normal exemption which is $62,500, $125,000 if you are part of a married couple. As it’s unlikely that such a profit will be made so quickly, this is not a bad situation. Any profit above the aforementioned thresholds must be declared as taxable income.
Thankfully, the IRS allow us some leeway when it comes to selling the home. Having a tax exemption of between $250,000 and $500,000 is certainly something to celebrate.
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