Calhoun County, AL – The real estate market has been booming for the past couple years. Numerous variables have contributed to a hot real estate market, including but not limited to historically low interest rates, higher construction costs, and a low inventory of homes available. With mortgage rates now rising, the local housing market is beginning to show signs of cooling. Even with the market cooling, home prices have remained elevated and many homeowners are considering selling their home. When selling your home, it’s important to consider the taxability of the transaction.
Your home is a capital asset. When capital assets are sold at a gain, the gains could be taxed differently than your normal wages or income. When an asset with an appreciated price is sold, the gains on the sale (sales price minus cost basis) are treated as either short-term capital gains or long-term capital gains in the year the asset is sold. A short-term gain is when the asset was held for one year or less and is taxed at your ordinary income tax rate. A long-term gain is when the asset was held for more than one year. Long-term capital gains receive preferential treatment and are taxed at either 0, 15, or 20 percent, which is dependent upon your taxable income that year.
However, the IRS tax code (Sec. 121) will allow the capital gains on the sale of your home to be excluded from taxation, under specific limits, if certain requirements are met. Those who file as “Single” on their tax return may exclude up to $250k worth of capital gains from the sale of their home. For those that file “Married Filing Jointly”, up to $500k of capital gains from the sale of their home may be excluded.
In order to avoid taxation on long-term capital gains from the sale of your home, certain requirements must be met. One rule is that the home must be considered your principal residence. Additionally, the taxpayer must have lived in the residence for two years within the five-year period preceding the sale of the home. Either 730 days or 24 full months will satisfy the two-year ownership and use requirements. Certain exemptions do exist if the two-year requirement is not met. Below is an example of when the gains on the sale of a home are excluded from taxation (not taxable).
EXAMPLES
- Sarah, who files “Single” on her taxes, bought her home in 2017 for $200,000. It became her primary residence. She did not make any improvements to the home and sold it for $260,000 in 2022. The $60,000 in capital gains on the sale of her home will not be taxable because this home was her primary residence for at least two years out of the previous five years before it was sold.
- Rick and Kathy, who file as “Married Filing Jointly”, bought a new home in January 2022 for $300,000. They turned around and sold the home six months later for $325,000. This would be considered a short-term capital gain and the $25k would be taxed at Ricky and Kathy’s ordinary income tax rate.
- John and Mary, who file their taxes as “Married, Filing Jointly”, originally bought their home as a rental property in 2015. The purchase price then was $150,000. They have not made any additional improvements to the home. They sold their home for $350,000 in 2022. Although it was originally purchased as a rental property, John and Mary have occupied this home as their primary residence for the past four years. The $200,000 in gains that resulted from the sale of their home are considered long-term capital gains and are excluded from taxation, according to Sec. 121 of the IRS tax code, because this home was their primary residence for at least two years out of the previous five years before it was sold.
Editor’s Note – Jonathan T. Jones® is a local financial advisor who will be a contributing author for the Calhoun Journal. He will be writing financial pieces to help readers understand the market and many changes that are currently happening in the financial world.
Jonathan T. Jones, CFP®
Wealth Manager/Financial Advisor, RJFS
501 Quintard Avenue, Suite 17
Anniston, AL 36201
256-237-2300
Any opinions are those of Jonathan Jones, CFP® and not necessarily those of Raymond James.
Securities offered through Raymond James Financial Services Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Wealth and Retirement Services is not a registered broker/dealer and is independent of Raymond James Financial Services.
