With home sales up in our area we are getting calls with questions about capital gains tax. Let’s see if our answer helps you!
Trying to sell the home I live in, will I have to pay capital gains tax on the sale?
Let’s start by defining a few things! First, if the home is your primary residence AND you have lived in the home for at least two of the last five years, you may be able to avoid capital gains taxes. For single sellers, the first $250,000 made from the sale of the home will be exempt from capital gains taxes. For married couples, that goes up to $500,000.
Here in Arizona, if homeowners have lived in their “main home” for less than two years, they will be liable to pay capital gains taxes. Arizona follows the equation for Federal capital gains on a home sale. The IRS defines a “main home” as the one in which you live most of the time. You do not have to live in the home continuously for two years in order to receive the capital gains exclusion – just two years cumulatively.
How do I determine the amount I am making on the sale of my home?
First, you take the amount you paid for the home. Add closing costs and any major improvements you’ve made to the property that are not just for decoration…like a new roof for instance. That is called the “seller’s basis”. Then you can add sales expenses like the real estate agents fees.
Subtract your total from the amount for which the home sold. You have your capital gains!
What if I’ve been renting my home?
Was the home your primary residence for two of the last five years? The same guideline applies. Remember, the two years do not have to be continuous. If you lived in the home for a year when you bought it, then rented it for three years until the renters moved out, and then you moved back into the home for another year, that will qualify.
If however, you bought the property to use as a rental and it has NOT been your primary residence for at least two of the last five years, you will have to pay capital gains taxes on money you make off the sale of the home.
One last note:
You can only benefit from the capital gains tax exemption once every two years. That means if you have two homes and sell both, you will pay the taxes on one of the properties. See IRS Pub. 523 for all the details.