The rise in home prices may have slowed in recent months, but many homeowners still saw healthy appreciation in 2014.1 For some, putting a property on the market may now look more tempting than it has in years.
If you’re planning to list a house, familiarize yourself with the relevant tax laws so you don’t get hit with a big, unexpected tax bill after closing.
The IRS gives individual taxpayers a $250,000 break on any profits made from a home sale. That break doubles to $500,000 for married couples. You can calculate your profit by subtracting your cost basis—the sum of your purchase price, settlement fees, certain closing costs, commissions and documented capital improvement costs (not repairs)—from your sale price. There is no limit to the number of times you can claim the exemption, as long as you meet a number of requirements.
For example, you must have owned the home for at least two years and used it as your principal residence for a total of 24 months out of the last five years. It’s important to note that for married couples, either spouse can pass the ownership test, but both spouses must pass the residency test to be eligible for the full tax break.
If you don’t meet these terms and were forced to move due to “unforeseen circumstances”—the term the IRS uses for events such as divorce or natural disaster—you still might qualify for the exemption. Be sure to keep good records and consult a tax expert before making any decisions.
1S&P/Case-Shiller 20-City Composite Home Price Index, as of 10/6/2014.