Capital Gains Tax Home Exclusion Rules Sellers Need to Know

The Tax Cuts and Jobs Act of 2017 offers a lot of changes to many tax payers.  Many are debating the pros versus cons of the new tax laws.  Although, the main goal of the reform appears to be to help the American tax payers and further stimulate the economy.  One area that had many in the real estate industry as well as homeowners worried deals with capital gains tax and the home sale exclusion.  First of all, we are not representing this as tax advice or that we are tax professionals.  Rather, we want to share types of questions or topics that sellers, Realtors, CPA’s, mortgage professionals, and more should discuss.  Plus, this discussion should take place before listing the home for sale.

In this article we compare the 2017 versus the 2018 tax law as it relates to capital gains tax on the sale of a home.  Additionally, we provide helpful tips on selling and buying homes.

2017 Capital Gains Tax Exclusion on Sale of Home

Per the IRS topic number 701 – Sale of your home, “If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income.  You may qualify to exclude up to $500,000 of that gain if you file a joint return with your spouse.”.  Sounds pretty good, doesn’t it?  So, how do you get this capital gains tax exclusion?  To qualify in 2017, the seller of the home must have owned and used the home as the primary home for 2 of the last 5 years of ownership.

capital gains tax Photograph on Unsplash

This may only be done once every 2 years and there are other potential exceptions such as for military, government housing, or installment sales.  It is always important to ask your tax professional to see if you qualify for this exclusion.  This has been a very popular way for homeowners or flippers to buy, occupy 2 years, sell for a profit, and not pay income taxes on the profit.  The profits are not even required to be put down on another property to avoid this tax!  So, what is the rule on capital gains tax for 2018?

12 Creative Negotiating Tips to Sell Your Home

2018 Capital Gains Tax Home Exclusion Rules

Homeowners want to know, “Will I pay a capital gains tax if I sell my home?”. So, these were the old rules.  But, there is great news!  Although both the Senate and House versions called for increasing the time frame for exclusion of taxation to 5 out of the last 8 years, the final negotiated version kept it at the last 2 of 5 years!  This would not have killed real estate but it would have definitely had a negative effect.

Should I Sell My House and Pay the Tax?

Let’s say, a homeowner does own a home less than 2 years and wants to sell for a profit.  First of all, if you are paying a capital gains tax, congratulations!  You made a profit on your home after all expenses and hopefully enjoyed the home during this period!  Key points are “profit” and “all expenses”.  You made a profit and you need to remember to calculate the allowed expenses to lower your tax burden.  Items such as Realtor commissions, seller closing costs, seller paid costs for the buyer, and certain improvements made to the home could reduce the taxable profit.  This is one of those areas where having a relationship with a CPA comes in handy.  In addition to the CPA, keep receipts for everything to do with the home.  It could be a write-off when you do sell the home.

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Buying a Home After Selling

If you are considering a sale, then there must be reasons and there are plenty!  Here are a few examples to sell the current home and most deal with life changes.

There are many other reasons to sell and purchase another home.  Basically, the homeowner needs to weigh the pros versus cons of selling by having a thorough discussion with an experienced Realtor.

Capital Gains Affect on Military Sellers

Military families are on the move quite often which means buying and selling often.  Service members receive their permanent change of duty station orders (PCS) and usually that means moving the family.  Living in a home 2 out of the last 5 years isn’t so tough.  A huge benefit for military sellers is that they can typically purchase the next home with no money down.  This is accomplished through a VA home loan.  Since a down payment may not be required and it is customary (not required) for the seller to pay the service member’s closing expenses, having the whole profit isn’t as important.  Therefore, any profit made on the home could be used for investing, paying debts, or down payment on a new home.  Finally, there are ways that military may be exempt from this tax rule, so ask a CPA.

What if I Sell in Less Than 2 Years and There is No Profit?

If there is no profit, then there is no capital gains tax to pay!  Keep in mind that just because the sales price is higher than the original purchase price, that doesn’t mean there is a taxable profit.  There are ways to lower that profit or even get rid of the whole thing.  This is another one of those moments where it helps to have a great CPA who can provide solid tax advice.

Prepare for Listing Your House for Sale

If a seller is going to depend on a Realtor or tax professional to provide solid advice on selling, it is important to keep documentation organized and safe.  Examples of items to keep for an eventual sale include…

  • Settlement statement or closing disclosure from purchase
  • Closing disclosure from recent refinance
  • Deed
  • Receipts for all home improvements
  • Warranties for appliances and other fixtures
  • Paint, tile, hardwood samples & names to match later
  • Lease contract(s) on the home over last 8 years

Great Opportunities in Real Estate

Hopefully, this article has provided a better understanding of the capital gains home exclusion.  Plus, it should help homeowners better prepare for a potential sale.  Luckily, the real estate industry dodged a bullet by keeping the 2 of last 5 years exclusion in place.  Looking into the future, there are many reasons why the housing market will continue to be strong.  Plus more and more families are looking to buy and be a homeowner.  Check out one of our recent articles “Will new tax proposals be the death of real estate?” and you will see there are a lot of positives for the taxpayer.  Many areas will lower tax burdens which make it easier to buy!

There is certainly opportunity for a lot of upside in real estate.  Just involve professionals in your decision.  No one has a crystal ball but you can speak to experts to gather information and make an informed decision.  If you are a seller looking to buy and are concerned about your scenario, contact us to discuss.

This article is not tax advice.  Always seek tax advice from a licensed tax professional or certified public accountant.

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Written By: Russell Smith