If you sold your home for more than what you originally paid for it, then you made a profit (or what the IRS calls a "capital gain"). However, unlike the capital gains involved with stocks or other securities, this profit is not taxable. Thanks to the Taxpayer Relief Act of 1997, the majority of homeowners are exempt from paying taxes on the money they made from the sale of their house if they qualify for a Section 121 exclusion.
What is a Section 121 Exclusion?
Section 121 Exclusion is an IRS rule that allows you to exclude up to:
- $250,000 if you're a single filer
- $500,000 if you file a joint return
To be eligible, you have to pass the ownership and use test. To summarize, a homeowner must have owned the home and used it as their primary residence for at least 24 months out of the previous 60 months relative to the date of sale. A few important details to note:
- The 24 months do not necessarily have to be consecutive (such as the case with people who travel for work or temporarily live in another state).
- The capital gains exclusion can only be used once every two years.
- If you or your spouse are on qualified official extended duty in the Uniformed Services, the Foreign Service, or the intelligence community, then the five-year requirement may be extended to 10 years.
In general, an investment property that was purchased for receiving rental income would not qualify since it was not the owner’s primary residence.
What If My Gains Exceed the Exclusion?
If you happen to sell your home and make a profit for more than these exclusion limits, then capital gains taxes will apply. To calculate how much is owed, use IRS Form 1040 Schedule D: Capital Gains and Losses and Form 8949, Sales and Other Dispositions of Capital Assets.
For more information about the sale of your home, please see IRS Topic No. 701.