When selling your house, capital gains tax is an issue that can cost you money or save you money. If you’ve never sold a home, or you haven’t sold a home in a long time, one thing you might not know is that the IRS allows you to exclude a portion of your profit from capital gains tax. Single homeowners can exclude up to $250,000, while married couples filing jointly may exclude up to $500,000 of the gain from the sale.
To qualify for the capital gains tax exclusion when selling your house, there are a few key rules to follow:
- You must have owned the home for at least two years within the five years before the sale.
- You must have lived in the home as your primary residence for at least those same two years as the homeowner.
- You can only claim this exclusion once every two years.
Selling your house during a divorce
If you’re selling your house during a divorce and you are still legally married, the usual capital gains rules still apply—including the requirement that you’ve lived in the home for at least two of the last five years. After the divorce is finalized, IRS Section 1041 offers some tax relief, allowing property to be transferred between ex-spouses without triggering capital gains taxes, as long as the transfer is related to the divorce and happens within one year. Be mindful though. The basis of the asset does carry over to the receiving spouse. In some cases, this window can extend up to six years, but specific documentation is required.
Reducing your capital gain by subtracting costs
When figuring out your profit from the sale of your home, you can reduce your gain by subtracting certain costs. These include: selling expenses like real estate commissions, closing costs, costs paid on behalf of the buyer, and qualified home improvements. Qualified improvements might include things like a room addition, a major kitchen or bath remodel, or replacing all the windows in the home—as long as those improvements are still in place at the time of sale. Minor repairs, like replacing a single broken window, generally would not count.
Inherited homes
When you inherit a home, its value is “stepped up” to the market value at the time of the owner’s death. This means you’re only responsible for paying capital gains tax on any future increase in value, not on the original purchase price. To ensure accurate reporting, it’s important to get a professional valuation of the property as of the date of death when handling the estate. In Georgia, which follows equitable distribution rules, a surviving spouse typically receives a step-up in basis for half of the home’s value—or the portion owned by the deceased spouse.
When it comes to selling your home, capital gains tax, and the divorce, of course, things can feel confusing and complicated. Hiring a Certified Divorce Real Estate Expert (CDRE), and consulting with your divorce attorney, your accountant, and/or your financial advisor is always a good idea. If you need us, we are happy to help!
