Capital Gains on a Primary Residence

Most property owners know that when they sell a secondary property, they will have to pay capital gains tax on the amount they have made. Most people, however do not really consider this situation when selling their primary residence.

This is because the IRS allows for a capital gains exemption for a residence that has been your primary location for 2 out of the last 5 years. This exemption on gains is $250,000 for a single filer and $500,000 for a couple filing joint taxes.

However, with recent housing market appreciation, more people than ever may be exceeding this exemption. Especially those who may have lost a spouse in the past years stand to go back to the single exemption.

When one spouse passes away, the remaining spouse has 2 years that they would get to still use the $500,000 gains exemption. After that they would drop down to $250,000.

One thing to note is that these exemptions are on property gains so they stack on top of the cost basis of the house. So, if you bought a house for $100,000 and you plan to sell it for $300,000 three years after the death of a spouse, you won’t owe any gains. If that sale price is $400,000 then you would owe capital gains tax on $50,000.

 In the example above, another thing you can do to help yourself avoid paying gains is to make sure you update the cost basis of your home regularly with your accountant. Adding in the cost of some of the repairs you’ve done over the years could be the difference between walking away with cash and owing annoying gains taxes on the sale.

If you have any further questions on this we would be happy to direct you to some helpful resources so that you can be prepared for when that time comes to sell a home.