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Real Estate Capital Gains

It’s important to know what taxes you will pay on your home sale as you are considering selling. Understanding the “Section 121 Exclusion” of the tax code is crucial.

This exclusion allows homeowners who meet specific requirements to exclude up to $250,000 (or up to $500,000 for married couples filing jointly) of capital gains from the sale of their primary residence. So, if you sell your home for a gain of less than these amounts, you won’t have to pay capital gains tax on that amount

C. Angus Schaal, CFP®

Senior Managing Director

Qualifying for the Section 121 Exclusion

You must meet certain criteria to qualify for a Section 121 Exclusion.

Primary Residence: You must have owned and used the home as your primary residence for at least two of the five years leading up to the sale date. The two years don’t have to be consecutive during the five years.

Frequency: You can only claim this exclusion once every two years.

Relevant Gains: The exclusion applies only to gains from your home’s sale, not losses. In addition, any portion of the profit exceeding the $250,000/$500,000 limit will be subject to capital gains tax.

Exceeding the Limit

If your profit exceeds the exclusion limit, you must pay capital gains tax on the amount above the limit. For example, if you are single and your profit is $300,000, $50,000 of that profit would be subject to tax. In that case, the amount you pay on the excess profit depends on your income and whether the gain is short-term or long-term. Long-term capital gains tax rates are generally lower than ordinary income tax rates.

Exclusion Exemptions

There are several exceptions to IRS home sale exclusion rules. These include giving the home to a spouse or ex-spouse, situations involving US military service members, or when the home sale is related to divorce, separation, or the death of a spouse.

In addition, if the home was ever subject to depreciation (i.e., used as a rental or home office deduction), then the depreciation previously claimed is subject to tax, even if the overall gain is below the Sec 121 exemption.

Partial Home Exclusions

If you don’t meet the eligibility test for the maximum home sale exclusion, you may still qualify for a partial exclusion. You can meet the requirements for a partial exclusion if the main reason for your home sale was a health issue, a change in work location, or an unforeseeable event.

Please contact your tax advisor and Tandem Wealth if you are considering selling your home so you can get a complete understanding of the tax impact on your portfolio.

Disclosures

Tandem Wealth Advisors LLC (“Tandem”) is an SEC-registered investment adviser. The information published herein is provided for informational purposes only and does not constitute an offer of investment advisory services. All information is subject to change without notice. Nothing contained herein constitutes financial, legal, tax, or other advice. No investment process is free of risk, and investors may lose all their investments. Past performance is not indicative of current or future performance and is not a guarantee. The opinions expressed in this document may not fit your risk and return preferences. The information provided is obtained from sources believed to be reliable, but we cannot attest to its accuracy. Past performance is not necessarily indicative of future returns. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations or comparable terminology. Due to various risks and uncertainties, actual events, results, or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation of future events or conditions. Additional copies of Tandem’s ADV Part 2A and/or Privacy Policy are available upon request by phone at 602-297-8600 or by email at [email protected]. *This information is current as of March 2024

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