Do You Owe Capital Gains Tax on Your Personal Home?

Before May 7, 1997, the only way you could avoid paying taxes on your principal residence home-sale profit was to use the money to buy another, more-expensive house within 2 years. Sellers 55+ could take a once-in-a-lifetime tax exemption of up to $125,000 in profits.

Fast Forward to the Taxpayer Relief Act of 1997

The Taxpayer Relief Act of 1997 meant that the rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts. Literally, millions of residential taxpayers felt the easing with this new law.

Q: What exactly did the Taxpayer Relief Act of 1997 ease?

A: Because most people rolled over their sales gains in another residence, the Taxpayer Relief Act of 1997 made it easier to dispose of your principal residence and create cash - you do not have to purchase a new home with the sales proceeds.

Q: Can you take a vacation or buy a Tesla with the profits of your home sale?

A: Yes. If it is your principal residence. Any profit up to $250,000 if you’re single and up to $500,000 if you’re married is non-taxable. You’ll be taxed on the amount above by the IRS limit.

Q: How many times can I sell my principal residence for a profit?

A: There is no limit to how many times you may sell your principal residence.

Let’s define “principal residence” because there are a few considerations to keep the IRS out of your pockets in Texas.

Simply put, your principal residence is the place that you live. It is not an investment property.

Q: How quickly can I sell my home -aka principal residence- for a profit?

A1: Here’s where you want to follow the letter of the law. You must live in your principal residence for 2 years before you can sell it for gains.

A2: If you own your home and decide to travel or lease it out, then you must live in the home for 2 out of the 5 years you own it.

When A Secondary Home Becomes Your Principal Residence

If I own more than 1 property and sell my primary residence for profit and then move into my other property, it technically becomes my primary residence, correct?

A: Yes.

Q: The IRS isn’t going to let me sell that in 2 years and earn all of the profits... are they?

A: Sadly, but not surprisingly it is not quite that easy. If you convert a second piece of real estate to your primary home, you'll owe tax on part of the sale based on how long the house was used as your second rather than your primary residence. You will want to plan accordingly.

Pro Tip: Ask your Realtor for a property evaluation just prior to changing the house status from a secondary to a primary residence. You want to know what your home is worth based on current market value.

Married Couples: Know This When Selling Your Primary Residence

Earlier, we identified taxable gains exclusions for singles vs couples as $250,000 and $500,000 respectively. But, not everyone buys their matrimonial home together. Sometimes, while living in a primary residence we get married. And, your spouse moves in.

Q: Can you sell the house a week after you’re married and claim the $500,000 exemption? Because that sounds like a business opportunity for singles...

A: No. There is an "ownership test". If you owned the home for the past 2 year and two of you were on title when you got married then you owned the primary residence for the requisite 2 years even if you’re filing jointly as newly weds.

Both spouses must pass the principal residence test for the $500,000 exemption.

Note: Shared use does not have to be while you file jointly. If you have shared the home for 1 1/2 years before getting married plus an additional 6 months as newlyweds, the IRS will allow you to claim the full $500,000 exemption. So, it’s something to be aware of if you’re potentially going to earn more than the $250,000 exclusion allowed to single homeowners.

If you have additional questions about your primary residence status, please let us know!