By William Perez. Tax Planning: U.S. Expert
William Perez has worked as a tax professional since 2004. He earned the enrolled agent designation by passing a comprehensive examination on federal taxes and maintains his credential by taking continuing education classes.
Generally, taxpayers can exclude up to $250,000 in capital gains when selling their primary residence. (The exclusion is $500,000 if you are married and filing a joint return.) But not everyone knows about this special tax treatment, which is known as the Section 121 exclusion .
Here's a typical scenario. Brian in Louisiana has owned and lived in his house for three years. He plans to sell the house for $150,000, and he bought the house for about $105,000.
Brian asked, "What kind of taxes do I have to pay when selling? I know have to pay realtor fees, but what, if any, other taxes are applicable?"
There may be transfer, stamp, or property taxes to be paid when selling a
house, and those taxes are listed in detail on the settlement statement prepared by the title company during escrow. However, there should be no federal income taxes. The tax code allows taxpayers to exclude up to $250,000 in capital gains ($500,000 if married), provided that the taxpayer has owned and lived in the property as their main home for two out of the past five years.
In Brian's case, his capital gain of approximately $45,000 would be completely tax-free since he has owned and lived in the house for three years.
Taxpayers who are selling their principal residence before meeting the two-out-of-five-year rule should consider determine if they qualify for a partial exclusion of their gains. The tax code allows taxpayers to exclude a portion of their gains if they are selling to relocate for work, for health concerns, for due to unforeseen circumstances. Taxpayers will also want to accurately calculate their capital gains to avoid paying more taxes than they need to.