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Home » Home Buying, Home Ownership, Home Selling, Taxes

Real Estate Capital Gains Taxes on the Sale of a Home

Last updated by on January 28, 2016

When you are about to sell your home, one of the first things that you should consider is if you will have to pay capital gains taxes on the sale. This is a topic that hasn’t come up much in recent years with property values declining, nevertheless, it should be on the radar of those joining the world of home ownership.

Capital Gains on the Sale of a Home: A Good Problem to Have

If you have to pay capital gains on the sale of a home, it’s really not a bad problem to have. It means your house has appreciated in value since you have purchased it. You’re luckier than just about anyone who has bought a home in the last 10 years! That being said, there are certain rules and exceptions that can exclude you from paying capital gains on the sale of property that should be at the top of your mind.

Real Estate Capital Gains Principal Residence Exclusion

real estate capital gains home saleThere is a huge real estate capital gains tax exclusion that allows you to exclude $250,000 in profit (individual) or $500,000 in profit (married). In order to be eligible for exclusion from having to pay capital gains, you must have lived in the home as your principal residence for 24 months out of the last 5 years.

Why should you pay attention to this? Well, if you are considering when to sell your home and you know that you will make profit on it, but you’re not quite to that 24 month mark, you may want to consider holding until the two year mark.

Exceptions to the 24 Month Rule

If you lived in your home less than 24 months, you still may be able to exclude a portion of the exclusion amount.

According to the IRS, principal residence exclusions are allowed for certain “unforeseen circumstances“, including:

  • death
  • divorce or legal separation
  • becoming eligible for unemployment compensation
  • a change in employment that leaves the taxpayer unable to pay the mortgage or reasonable basic living expenses
  • multiple births resulting from the same pregnancy
  • damage to the residence resulting from a natural or man-made disaster, or an act of war or terrorism
  • condemnation, seizure or other involuntary conversion of the property.

Capital Gains Partial Exclusions

The maximum partial exclusion that one can use if they meet one of the previously mentioned exclusions is limited to the percentage of the 24 months that the person fulfilled the requirements. As an example, if you owned and occupied a home for one year (half of two years) – you may exclude half the regular maximum amount, or up to $125,000 of gain ($250,000 for most joint returns). The proportion may be figured in days or months.

How do you Report Capital Gains on Real Estate in your Tax Return?

You must use IRS Form – Schedule D to report gains. When you have owned your home for less than a year, it is considered a short-term capital gain. Over a year is considered a long-term capital gain.

Can you Deduct Capital Losses on a Home Sale from Taxes?

Sorry, no. Real estate capital gains (and capital losses) are treated completely differently than other investments. Capital losses cannot be treated as tax deductions.

What About Exemptions on Capital Gains for Investment Property?

Sorry, you are not excluded from paying capital gains. In fact, capital gains on real estate were primarily created to take a cut of investment property gains. This goes back to the home needing to be your principal residence for two years rule.

More IRS Real Estate Capital Gains Tax Help

If this is a topic that hits ‘close to home’ (pun intended), you may also want to check out these IRS articles:

Home Sale Taxes Discussion:

  • Have you had to pay capital gains on a home sale?
  • Have you been eligible for the exclusion on a previous sale?
  • Did you wait to hit two years before selling to be eligible for the exclusion?

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I am G.E. Miller, & this is my story. My goal is financial independence ASAP. If you share that goal, join me & 10,000+ others by getting FREE email updates. You can also explore every post I have written, in order.

  • Aury (Thunderdrake) says:

    Apparently in the US, they have something for for real estate capital gains called a 1031 deferred exchange. I don’t know too much about it being Canadian and all, but it might be worth looking into.

  • Lorin Lyle says:

    What happens if I have lived in the property for two of the last five years, just got married, and am now selling the property? How much would be excluded from capital gains? $250,000? or $500,000?

  • Lisa says:

    Got married April 2008…moved to his house 10 miles away. I had house that was my primary residence for 30 years before I married. Went out and checked on it often then son moved into it. No rent collected. Son is moving out. Now selling house. Will I owe capital gains on it since it was my primary for 30 years. Thanks so much!

  • Rick says:

    We mistakenly believed we were eligible for the exclusion of capital gains and sold the home 7 days short of the full two year requirement. We do not meet any of the special pro rata exceptions. Any advice would be appreciated.



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