Or is it? I hear a lot of confusion around taxes upon selling a primary residence.
People believe a mash up of rules that include those for selling a rental property or long outdated laws about downsizing as a retiree.
It’s fairly straightforward (as IRS rules go). If you are single, the first $250,000 of profit on the sale of your primary residence is tax free. Profits above $250,000 are taxed at capital gains rates.
For married couples, the tax-free profit is $500,000.
The cost basis is the purchase price of the house plus any improvements. Keep those receipts for any remodeling, new windows, improved landscaping, or other investments you make in your home. That could be the difference between no tax bill and a bad surprise when you go to sell.
You must have lived in the property as a full time resident for 2 out of the last 5 years to qualify for the tax deal.
There is no requirement that you take any portion of the money to buy a new home. Ever. At any time.
The tax break can be used multiple times in your lifetime, as long as you meet the 2 out of 5 year rule for living in the home.
Common misconceptions:
- Rules stating that you have to buy another property within a certain time frame to avoid tax have to do with second homes or investment property.
- This does not apply to your primary residence.You could move out of your primary residence and never buy another house again and still keep the profits tax free as described above.
- The rule about only one tax exemption on the sale of a primary residence for senior citizens is an old one and was replaced by the current rules.
I hope this alleviates some worry if you are looking to sell a house that you have made big bucks owning!
