One of the great things about owning your own home is the tax breaks you can receive as a homeowner. So, what happens when you go to sell your home. Many of you have probably heard horror stories about something called a capital gains tax, which you have been told you have to pay when you sell your home. Every year we are asked if you can avoid the capital gain tax. And with the tax season in full gear we want to address this important question in detail.

While it seems like nothing is ever easy or straight forward when it comes to the IRS, the answer to this question is pretty straight forward. If you are selling your home you can exclude a certain amount of the selling price from a capital gain tax. However, how much you can exclude depends on your filing status and on whether or not you can pass the ownership and use test.

In terms of filing status if you are single you can exclude $250,000 or below, married filing jointly you can exclude $500,000 or less. Even if you are not married but you own a home with somebody as long as you both meet the use and ownership test you can exclude $250,000 or below each.

To claim the entire amount described above you must meet the use and ownership test. To meet these tests you simply must have lived in the home as your primary residence for two out of five years before you sell the home. You must also have personally owned the home two out of the five years.

Sell House

Now that you know you can exclude a specific amount let’s talk about the capital gain tax. Many homeowners mistakenly assume that it is the [profit on the sale. And while it does include the profit on the sale, there is some other stuff that you need to be aware of. The capital gain is the price you sell your home for, less certain expenses. From the selling price you can deduct your selling and closing costs, as well as your tax basis. To figure out your tax basis you need to look at what you originally paid for the home and add in the cost of any major improvements and the purchasing costs. You will then need to deduct any casualty losses, deprecation or insurance payments.

One of the benefits to the capital gain tax exclusion is that even if you don’t meet the use test you can still exclude a portion of the gains from your taxes, but only if you sold it for a specific reason. In order to claim the partial exclusion you will have to be selling your home due to some unforeseen circumstance, such as divorce, but you can also be selling it for medical reasons or a change in your employment. If this is the case you can exclude the portion based on the time you lived there.