As a professional practicing CPA (I know..I made poor life choices), I bet every other month I have a client ask a variant of the following question: “I’m selling my house. Do I have to pay tax on that?” Sometimes, the answer is “It depends on who you are asking”. If you ever ask someone from the government this question, the answer is nearly 9 times out of 10, you definitely have to pay tax. But I say in the immortal words of the great Lee Corso:
Inside the depths of the IRC (that’s tax speak for Internal Revenue Code) there lies a great exclusion from tax for the gain on the sale of your personal residence. Here is how it works. First off, you are only taxed on the gain you make off the sale, not your gross selling price. You are allowed to deduct things like:
- brokerage commissions
- home improvements
- your original cost of the house
from the sales price. This net amount, the gain, is at most what you might pay tax on.
If you owned your house for at least 2 years and it was used as your personal residence for at least 2 out of the last 5 years, you can exclude up to $250,000 of gain income from taxation. If you owned the home jointly with your spouse, you both get the exclusion. That’s $500,000 of gain to be excluded from tax.
That’s the basics. Like everything in the IRC, there are a bunch of other details that can affect this “simple” exclusion like:
- I own multiple personal residences
- I didn’t own it 2 years
- My spouse died
- What is a personal residence?
- I rent it out
If you run into questions like these, contact a professional for help. Don’t call the IRS. They’ll just tell you its taxable.