Owning a home can be a good way to build wealth, especially over the past decade where home prices have made steady gains since the country exited the Great Recession.
Selling a home for a profit typically generates a capital gains taxable event. However, there are some exclusions. Read on to learn about the capital gains tax exclusion for primary residences and how often you can claim it.
Home Ownership and Use Test
According to the Internal Revenue Service, homeowners can qualify for an exclusion on any realized gains from the sale of a primary residence if they meet both the usage and ownership requirements.2 This exclusion is significant – up to $250,000 for single filers, and as much as $500,000 for married couples who file a joint return.
- Usage test: You qualify for the exemption if you used the home as your primary residence for at least two of the past five years.
- Ownership test: You owned the home for a minimum of two years.
These two-year periods don’t have to occur in the same time frame. For example, say you purchased an investment home five years ago but decided to live in it these past two years. You meet both requirements and qualify for a capital gains exclusion if you decide to sell the home.
When completing your tax return, you will need to report the sale of the home on Form 8949, Sale and Other Dispositions of Capital Assets if your taxable gains exceed the exclusion amount, or if you received a Form 1099-S, Proceeds From Real Estate Transactions in the mail from the IRS. You can expect to receive a 1099-S when you sell your home if you don’t meet the exclusion requirements.
It’s also important to remember that you are only taxed on realized gains. If you bought your home for $400,000 in 2010 and sold it for $600,000 in 2022, there are only $200,000 in capital gains to account for. That number also could be lower if you made any capital improvements to the property, which will reduce your original cost basis in the asset.
How Often Can You Claim the Capital Gains Exclusion?
You can exclude capital gains from the sale of a primary residence once every two years. If you want to claim the capital gains exclusion more than once, you’ll have to meet the usage and ownership requirements at a different residence.
The Bottom Line
Homeowners can leverage the capital gains exemption multiple times provided they meet the qualifying criteria established by the Internal Revenue Service. Generally, if you own and live in a home for at least two years, you qualify for a capital gains exemption when you decide to sell the property. The new two-year period starts at the close of sale of your former residence.
Consult with a certified tax professional if you still have any questions about the capital gains exclusion when you sell your primary residence.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.
FAQs
You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married and filing jointly. The exemption is only available once every two years.
How often can you take the capital gains exemption? ›
How Often Can You Claim the Capital Gains Exclusion? You can exclude capital gains from the sale of a primary residence once every two years. If you want to claim the capital gains exclusion more than once, you'll have to meet the usage and ownership requirements at a different residence.
Is $500 000 lifetime capital gains exempt? ›
Not All Gain Is Taxable
There is an exclusion on capital gains up to $250,000, or $500,000 for married taxpayers, on the gain from the sale of your main home. That exclusion is available to all qualifying taxpayers—no matter your age—who have owned and lived in their home for two of the five years before the sale.
What are the two rules of the exclusion on capital gains for homeowners? ›
The seller must have owned the home and used it as their principal residence for two out of the last five years (up to the date of closing). The two years do not have to be consecutive to qualify. The seller must not have sold a home in the last two years and claimed the capital gains tax exclusion.
What is the 2 out of 5 years rule? ›
When selling a primary residence property, capital gains from the sale can be deducted from the seller's owed taxes if the seller has lived in the property themselves for at least 2 of the previous 5 years leading up to the sale. That is the 2-out-of-5-years rule, in short.
Is there a one time forgiveness on capital gains tax? ›
You can sell your primary residence and avoid paying capital gains taxes on the first $250,000 of your profits if your tax-filing status is single, and up to $500,000 if married and filing jointly. The exemption is only available once every two years. But it can, in effect, render the capital gains tax moot.
What is the 2 year rule for capital gains tax? ›
Sale of your principal residence. We conform to the IRS rules and allow you to exclude, up to a certain amount, the gain you make on the sale of your home. You may take an exclusion if you owned and used the home for at least 2 out of 5 years. In addition, you may only have one home at a time.
How many times can you take the home sale exclusion? ›
You're only allowed to exclude gain on the sale of a home once every two years. This is true unless the reduced gain exclusion rules apply.
How do I avoid capital gains tax? ›
A few options to legally avoid paying capital gains tax on investment property include buying your property with a retirement account, converting the property from an investment property to a primary residence, utilizing tax harvesting, and using Section 1031 of the IRS code for deferring taxes.
Can I claim 3000 capital gains loss? ›
Capital losses that exceed capital gains in a year may be used to offset ordinary taxable income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.
In 2023, individual filers won't pay any capital gains tax if their total taxable income is $44,625 or less. The rate jumps to 15 percent on capital gains, if their income is $44,626 to $492,300. Above that income level the rate climbs to 20 percent.
How do I avoid capital gains on sale of primary residence? ›
1. Live in the house for at least two years. The two years don't need to be consecutive, but house-flippers should beware. If you sell a house that you didn't live in for at least two years, the gains can be taxable.
Do I pay capital gains if I reinvest the proceeds from sale? ›
To avoid paying capital gains taxes (and any depreciation recapture), you can reinvest in a "like-kind" asset with a sales price of at least $500,000. The IRS allows virtually any commercial real estate property to qualify as 'like-kind” as long as you hold it for investment purposes.
What is the 6 year rule for capital gains tax? ›
Here's how it works: Taxpayers can claim a full capital gains tax exemption for their principal place of residence (PPOR). They also can claim this exemption for up to six years if they moved out of their PPOR and then rented it out.
What is capital gains tax on 200000? ›
= $
| Single Taxpayer | Married Filing Jointly | Capital Gain Tax Rate |
|---|
| $0 – $44,625 | $0 – $89,250 | 0% |
| $44,626 – $200,000 | $89,251 – $250,000 | 15% |
| $200,001 – $492,300 | $250,001 – $553,850 | 15% |
| $492,301+ | $553,851+ | 20% |
Jan 11, 2023
If you used and owned the property as your principal residence for an aggregated 2 years out of the 5-year period ending on the date of sale, you have met the ownership and use tests for the exclusion. This is true even though the property was used as rental property for the 3 years before the date of the sale.
Do you have to wait 2 years to avoid capital gains? ›
If you have owned and occupied your property for at least 2 of the last 5 years, you can avoid paying capital gains taxes on the first $250,000 for single-filers and $500,000 for married people filing jointly.
How much capital gains loss can you take in one year? ›
Capital losses that exceed capital gains in a year may be used to offset ordinary taxable income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.
