Selling the house you’ve fondly called home is a significant life event.
Whether you are in the process of relocating to another state, moving out of your starter home, going through a divorce, or downsizing to a smaller unit, it is important that you understand the home selling process, especially when it comes to the taxes involved.
Here is a simple overview of what you need to know about the taxes when selling a house.
Do you need to pay any taxes when selling a house?
After selling your house, you might be wondering if you have to pay taxes on the profit you earned from the sale. The answer depends on how much profit you gained and how long you owned and lived in the house before the sale.
- If you owned and lived in the house for two of the five years before the sale date, then up to $250,000 of any profit you made is tax-free.
- If you are legally married and you and your spouse both filed a joint tax return, the tax-free amount doubles to $500,00. Remember that this is based on the profit you gained from selling your house and not on the total income.
- If you lived in the house for two of the five years leading up to the sale and you sold it for less than $250,000 over your buying price, you don’t need to pay any taxes.
How do I qualify for this home selling tax break?
There are three requirements you need to meet to qualify for a tax break:
- The home you are selling must be your primary residence for at least two of the previous five years before the sale date. If you have secondary homes such as rental units, vacation homes, or investment properties, do not expect them to be eligible for a tax break.
- You must have owned the home you are selling for at least two years or 24 months within the five years before the sale date. It doesn’t necessarily need to be continuous, nor does it have to be the two years leading up to the sale. As long as you have ownership of the house for at least two years, you are eligible for the tax break.
- You must not have claimed this tax break on another home you are trying to sell within the past two years. If you are selling several of your properties, you can only apply the tax break to one of your properties.
If you satisfy these three basic requirements, you are then eligible for the tax break. However, if you failed to meet all of them, there are still special circumstances that may enable you to claim either a partial or complete exclusion.
When selling your house, you must be fully aware of the tax implications involved so you can navigate them properly. To avoid any legal concerns, it is important that you do your research or talk to a professional to guide you through the process.