How You Can Sell Your Home Tax Free

Attorney Thomas B. Burton discusses how you can sell your home and potentially owe no capital gains tax on the sale of your home as long as you meet the IRS use and length of time tests. Attorney Burton discusses the IRS test to qualify for the capital gains tax exclusion on the sale of your home and discusses how the test works in practice.


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Transcript of Video: How You Can Sell Your Home Tax Free

In today's video I'm going to talk about how you can sell your home, tax-free. Now this is a special tax break that the IRS offers to anyone who sells their principal residence, this is only for real estate that you owner occupy and it's based on what they call the two-year ownership and use rule what that means is if you buy a home and owner occupy it for at least two years you can sell the home and as a single person you can shield up to $250,000 in capital gains, from paying any tax. So, you could buy the home for $300,000 and sell it at least two years later for $350,000 and pay zero capital gains tax. Capital gains is taxes applied to any asset held longer than a year and for most folks it's going to be a 15 percent capital gains tax rate.

I have the IRS tables here for 2019, and if you're single if you make over $39,375, you fall into that 15% capital gains up to making $430,000 a year about that if you earn more than that single you pay 20% long-term capital gains. For a married couple you can make up to $78,750 jointly and you pay no capital gains, but if you fall between $78,751 and $488,000, you're going to be in that 15% capital gains tax rate. Above $488,000 in income, 20% capital gains tax rate, but for most middle-class families, you're going to fall into that 15% tax bracket so you can own and owner occupy a home and sell it and pay no tax at all. Now in my experience as an attorney this is one of the best tax breaks out there and that's because it's rare to have any gain be not taxable and this capital gains tax exemption is current in 2019, when the tax reform was passed at the end of 2018, some people wanted if it would go away but it still exists so now you say to me, what if I am married? So I mentioned those capital gains tax rates for married couples, if you're married you can double that $250,000 exemption you each get it so if you own a home jointly as a married couple you can sell it and shield up to $500,000 in capital gains and I did some quick math here, let's say you're in the 15% bracket, and you’re a single person and you own the home more than two years and you sell it at a $250,000 gain at 15% that would be $30,000 in capital gains tax you would otherwise pay you can wipe that all the way the sale is tax free. Married, let's say you double it to $400,000 at 15% that's $60,000 tax free so the maximum for a single person would be if you owned a home and sold it for that more than $250,000 again, you could get $37,500 tax free and for a married couple it would double to $75,000 at that 15% rate, if you're in the twenty percent back it'll be higher so again the thing to focus on here is that you must own and owner occupy the home for two years in order to qualify for this. And there's a special form you fill out a suggested with the IRS when you sell the home your closing company your title company should provide that form, but make sure if you're selling an owner occupied house you flag this for them so they include that form so you can correctly put this on your taxes and watch my other video I'll talk about exactly how you go through claiming this exemption or capital gains for the sale of your home.

Now you say to me, but what happens if I bought the home, I lived there for two years and then I turned it into a rental and I've been renting it out the last two years but I moved across town to a bigger home? Well there's a rule for that and we call it the two out of the last five years test, so if you did live in the home and it was your primary residence for their two years out of the last five, you can still qualify for the exemption. So if it is some situation where you moved out of the home, but you did owner occupy it for at least two years, you need to have good records to show that was your primary residence for two years, but if it's within the last five years, you can still claim the exemption so this is what the IRS calls the two out of the last five year rule. So again, it had to be your principal residence for those two years and it must have been within the last five years before you sell it that it was your principal residence for last two years. Because of that two year rule you can only use this exemption once every two years but for people who buy homes fix them up and flip them and sell them every two years, they can be doing this and claim the exemption and as I pointed out in the previous figures, that is a lot of money, you can shield from capital gains taxes and is one of the best tax breaks out there that I know of. So again this a way you can owner occupy your primary residence and sell the home for absolutely zero in capital gains tax. Thanks for watching and we'll see you next time!

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Transcript and captions provided for ease of access for the hearing impaired.

For questions about this topic, or to suggest a topic for a future blog post, please contact my office.

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