Understanding Tax Exceptions
Individuals who are selling their homes may be concerned about potential capital gains taxes at the end of the year. This is a very real concern, although many homeowners qualify for specific exemptions to the capital gains tax ruling. In spite of the political rhetoric about capital gains after a home sales, there are many exemptions that apply, which means that many who sell their homes will not be required to pay a capital gains tax on a home sale.
Here are some of the possible exceptions to the capital gains tax ruling as explained by Internal Revenue Service Publication 523.
A) Exemption for natural disaster - if your home was devastated by a natural disaster or an act of war, you may not be required to pay capital gains taxes on the sale. Generally, a natural disaster is declared either by the governor of a state or may be declared by the federal government. If you've sold your home after this type of devastation, chances are the proceeds will be free of capital gains taxes;
B) Exemption for change in job circumstances - those who are laid off, transfer or change jobs may have exemptions available for capital gains. These changes include transfer to another state, loss of income from changing jobs, which makes the home unaffordable, and sale of home due to layoffs or in some cases retirement. Those who have to give up their jobs due to medical conditions may also be exempt from capital gains tax. There may be some restrictions, however, this should be investigated;
C) Lifestyle changes - couples who divorce and the divorce results in the family home being sold, couples who are blessed by multiple births, or those who have suffered the loss of their spouse may also be eligible for capital gains exemptions. These lifestyle changes can mean you are not subject to capital gains taxes on a home sale;
Those who feel that they may be exempt from capital gains tax after selling a home are strongly urged to seek the advice of a tax accountant who can help them navigate the paperwork. You should never pay capital gains tax without checking with an accountant or other tax professional to see if you are subject to these taxes. Those homeowners who are comfortable filling their own taxes should make sure they are familiar with the rules.