If you sell your house for more than you paid for it, you are likely to incur a “capital gains tax” on the profit. If you hold the house for less than a year (“short term capital gains”), you will be taxed at the ordinary income tax rate. If you hold the property for more than a year (“long term capital gains”), the tax rate is lower.
However, sometimes you can avoid paying taxes on the sale altogether. One example is found in the Internal Revenue Code. The IRS offers an exclusion for gains made while selling your principal residence.
IRC 121 – Exclusion of gain from sale of principal residence
26 U.S. Code Section 121 says the following:
“Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more.”
What this means is that you can sell a house without paying capital gains tax on the profit (up to the limit, discussed below) as long as you’ve owned and used the house as your principal residence for at least 2 of the last 5 years.
How much gain can we exclude?
For an individual, you can exclude up to $250,000 of gains. For a married couple filing jointly, you can exclude up to $500,000. That’s half a million dollars in profit without getting taxed!
How often can we do this?
The IRS allows you to do this every 2 years. So, theoretically, you could sell your principal residence every 2 years and upgrade without being taxed on the profit.
What if my home is held by a business entity or a trust?
You may still qualify for this exclusion even if your home is held by a qualified business entity, such as a limited liability company (LLC). The LLC must have a single owner and be disregarded for federal tax purposes. If you meet the requirements, the sale will be treated as if made by you. Similarly, if you own your property through a trust, you may still qualify for this exclusion.
Not everyone is aware of this valuable and important tax break. Knowing about this and other available tax benefits can save you a lot of money. Please be aware that the law has specific requirements to take advantage of this. You should consult an expert, such as a CPA or a qualified attorney before attempting to claim this exclusion.
Palisade Realty can help you buy or sell real estate
Whether you’re looking to sell or buy, whether it’s to live in or for investment, and whether it’s commercial or residential, Palisade Realty is here to help. We will walk you through all necessary steps and help you find the right property for you.
If you’re interested in learning more, please call us at (619) 794-0218 to discuss how Palisade Realty can help you.