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.
While there are exceptions to capital gains tax after selling a home, there are some typical exemptions that may also be applied that many homeowners are not aware exist. These exemptions provide significant potential to taxpayers who fear the capital gains tax is going to be due after a home sale. Here are some typical exemptions to capital gains on a home sale:
A) Length of time in home - provided that the homeowner has lived in their home for two of the last five years, capital gains are excluded for a fixed amount of $250,000 for a single person and $500,000 for a married couple;
B) Military personnel exemption - according to IRS publication 523, military persons who have sold their home due to relocation may also be exempt from capital gains taxes. This ruling also applies to certain diplomatic personnel;
C) Divorce exemption - for couples who divorce and a property sale is mandated by the court documents, there would be no capital gains tax applied to the sale of the home. This rule applies whether the property was merely transferred or if one party was bought out. It is important to note that this also applies for capital loss (e.g., there is no loss allowed in case of divorce). It is important that those who are selling their homes understand there are exceptions to this.
These are the three primary exemptions to capital gains tax after selling a home. There are others that may apply to individual cases and they should be investigated prior to a tax filing.
Other Factors That Apply
Another factor in determining the capital gains tax due will be the cost basis. It is crucial that a homeowner carefully reviews the cost basis information per the Internal Revenue Service guidelines to ensure that a proper cost basis is being used. The difference could be a smaller capital gains tax.
Be certain that you have reviewed all the guidelines in IRS publications that apply to the sale of your home. Understanding your exemptions could mean the difference between paying a capital gains tax and avoiding capital gains tax. Taxpayers who are uncertain about the rules should contact appropriate assistance or read the materials that are supplied by the Internal Revenue Service for guidance.