3 Tips to Reduce Capital Gains Taxes when you Sell your Home

It’s probably not news to you that, during the financial crisis, home prices tanked completely. For example, the S&P Case-Shiller 20-City Home Price Index declined to about 30% to 140 and the 10-City Index fell by almost 34%. Within just a few short years the meteoric rise in home prices seen in the first half of the decade had plummeted.

Things have changed in the last couple of years however and the time to sell might be right again. Of course if you sell and make a profit you can expect old Uncle Sam to ask for his cut of the proceeds but luckily there are a number of tax code provisions that will help you lower your capital gains taxes and keep more of the profit where it belongs, in your own pocket. We’ve got 3 of the best of them below. Enjoy.

1. Selling your home, not a house

You are allowed to exclude a certain amount of profit that you make when you sell your home from your taxable income, up to $250,000 for an individual and $500,000 for married couples filing jointly. The exception to this rule however is that the house you sell must actually be your home, not just a house that you own.

It may seem like a silly difference but, from a tax standpoint, it’s not. You must have lived in that house for at least two of the last five years in order for it to be considered your home and, although these years don’t have to be consecutive, if it’s a vacation house that you use for 2 or 3 weeks a year it won’t qualify.

One thing that’s important to note is that several different types of residences can actually classify as a “home”. For example, a mobile home, condo, apartment or even a boat can be considered a home and qualify for the exclusion. You can claim this exclusion, with certain conditions, every two years but make sure that you do it correctly so that if Uncle Sam starts poking around you have a leg to stand on.

2.  Record everything in a Diary

All those thousands of receipts and any other documentation could prove very useful in minimizing your tax bill. When it comes to capital gains exclusions, you want to be able to take advantage of all of the exceptions and conditions that you can and a legible paper trail for the IRS to follow is a very good idea to have.

You can claim, for example, a partial exclusion if you’ve been forced to sell your home before you lived in it for two years due to an illness or accident that forced you to be hospitalized. Keeping receipts and other documentation from your doctor will help you to make your case to the IRS. While these documents don’t necessarily need to be submitted when you file your taxes, getting them at the time the services are performed is a lot easier than trying to find the doctor two years later and get them then.

3. Partial exclusions to the 2 year rule

When it comes to the rule saying you need to have lived in your home for 2 of the past 5 years, there are actually three exceptions that you can use to get around it.   We already mentioned the first which is due to medical concerns that force you to be hospitalized. The second are events like natural disasters that displace you from your home and the third is that your employer asks you to relocate for your job.

Whatever your particular situation happens to be, some of the profits they made on the sale of your home can be excluded (but only some of them). If you are forced to move out of your home for one of these three reasons you can exclude money in the amount of profit that’s relative to the time that you actually lived in that residence.

If, for example, you’re a single filer and you want to sell the condo you owned in California and lived in for 6 months, 25% of the $250,000 standard exclusion can be excluded, or $62,500.

So as you can see there are at least 3 excellent options that you have in order to reduce your capital gains taxes. We hope these have helped you and that, when it’s time to sell your home, you’re actually able to make a profit. Best of luck.

11 thoughts on “3 Tips to Reduce Capital Gains Taxes when you Sell your Home

  1. Pingback: Carnival of Money #19 | Carnival of Money

  2. Pingback: Carnival of financial independence 52nd edition - Reach Financial Independence

  3. Pingback: Yakezie Carnival - 2 Copper Coins

  4. Pingback: Financial Carnival for Young Adults

  5. Pingback: Carnival For Retirement – Brick By Brick Edition | Brick By Brick Investing

  6. Pingback: Carnival of Money #20 | Carnival of Money

  7. Pingback: Carnival of Personal Finance #453 & 454: Life Changes Edition | A Gai Shan Life

  8. Pingback: Aspiring Blogger – Personal Finance Carnival #33 | Aspiring Blogger

  9. Great article! We will be either selling our current house or turning it into a rental property within the next few years, and one of my concerns was possibly being taxed on gains from the sale. Keeping this for future reference!

    • Good luck either way… selling it yourself can save quite a bit of money if you go that route. I did that just this past summer and saved on all of that agent commission!

  10. Pingback: Dwindling Debt – Good news for US homeowners as Foreclosures fall to lowest level since ‘07

Leave a Reply

Your email address will not be published. Required fields are marked *