When you receive the check for selling your home, the excitement at the large dollar figure usually lasts only until the size of the tax bill crosses your mind. Fortunately, there are several ways the IRS lowers the amount subject to taxes. The only specific tax break for married couples selling their home is the doubling of the home sale exclusion, but it can be a big help. In addition, there are several other ways you can minimize the tax hit from the sale.
Primary Residence Exclusion
The primary residence exclusion allows up to $250,000 of the gain on the sale of your home to be tax-free. To qualify, you must meet the ownership and use tests. The ownership test requires that you owned the property for at least two of the past five years. The use test requires you to have used the home as your primary residence for at least two of the past five years. These periods don't have to be consecutive, nor do they have to be concurrent. For example, if you leased the home to use as your primary residence for two years before you bought it and then used it as a second home for two more years, you qualify. Finally, you cannot have used the primary residence exclusion within the past two years. Uncle Sam's generous with home sales, but not generous.
Doubled for Qualifying Spouses
If you qualify, you can double the exclusion so that you can exclude up to $500,000 of gain from the sale of your home. To qualify, you must file a joint return, one spouse must meet the ownership test, both spouses must meet the use test, and neither spouse can have used the exclusion within the past two years. If one or both spouses does not meet these requirements, the exclusion is equal to the amount that each spouse would have been able to exclude separately. For example, if you meet the tests so that you could exclude $250,000, but your spouse doesn't meet the use test and can't exclude anything on her own, you can only exclude $250,000 as a couple.
Decreasing Your Recognized Gain
The amount you receive from your sale isn't the amount you pay taxes on. Instead, you only pay takes on the amount by which your realized gain exceeds your adjusted basis. Generally, your adjusted basis is the amount you paid for the home, plus the cost of any improvements you made while you owned it. The amount you realize is the selling price minus your selling costs, such as commissions, advertising fees, legal fees and loan charges you pay. If your profit is less than the amount you can exclude under the home sale exclusion, you don't have to pay any taxes on your sale.
Capital Gains Rates
If you've owned your home for more than one year and you can't exclude all of your gain, the remaining income is taxed at the lower capital gains rates. As of 2012, the capital gains rate is 15 percent for most capital gains. For example, if you've held the home for more than one year and you have $50,000 of gain that you can't exclude, instead of that $50,000 being taxed at ordinary income rates, which are as high was 35 percent as of 2012, the gain would only be taxed at 15 percent, saving you $10,000 on your taxes.
- Comstock/Comstock/Getty Images