Friday, April 11, 2014 / by William Culp
For those who sold their home this year, it's important to understand how selling your home may impact your tax returns, now that tax season is drawing to a close. Below is a breakdown on how capital gains work for those who have recently sold a home.
If you sell your primary residence, you may be able to exclude up to $250,000 of gain – $500,000 for married couples – from your federal tax return. To claim the exclusion, the IRS says your home must have been owned by you and used as your main home for a period of at least two out of the five years prior to its sale.
The are a few catches, however. You also must not have excluded gain on another home sold during the two years before the current sale. Additionally, special rules apply for members of the armed, uniformed and foreign services and their families in calculating the 5-year period.
If you do not meet the ownership and use tests, you may use a reduced maximum exclusion amount. But only if you sold your home due to health, a change in place of employment, or unforeseen circumstances.
Do you need to report gains?
An extra perk is that if you can exclude all the gain from the sale of your home, you do not report it on your federal tax return. If you cannot exclude all the gain, or you choose not to, you must use Schedule D of Form 1040, Capital Gains or Losses, to report the total gain and claim the exclusion you qualify for.
How about for those with more than one home?
You can exclude the gain only from the sale of your main residence. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is usually the one you live in most often.
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