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How To Keep At Least $250,000 Tax-Free When You Sell Your Home

If you've lived in your home for 2 years or longer, you can keep more of the profit from your home sale.

tax-season-financial-benefitsOver the past year, we have seen an increase of 10.4% on home prices nationally, according to Trulia’s Price Monitor. We are witnessing the beginnings of a robust recovery from the housing market crash of 2008–2012. Thus, if you have owned your home for more than seven years, it is possible that you may be seeing a small to significant increase in value of your home over your original purchase price.

That is great news for those planning to sell their homes!

Now that tax time is upon us, it is the perfect moment to get cozy with the current tax rules, if you think you will be coming out ahead with some capital gains profit on your property.

Here are three you need to know now: 

The two-year primary residence tax breaks

The issue of taxes boils down to this question: How long have you lived in your house? If you’ve lived in your home for two years or more, and it’s been your primary residence, you can pocket up to $500,000 tax-free upon the sale of your home. This assumes you have a spouse or partner with whom you file joint taxes. If you are single, then you can exempt half of that — $250,000 — from taxes.

If you sell in less than two years but … you move more than 50 miles away

If you have to move because of work relocation, health reasons, or certain unforeseen circumstances, you can prorate the taxes on your profit. That means you can keep 25%, 50%, or even 75% of your profit, tax-free, depending on how long you have owned your house — as long as it has been your primary residence.

One very important number: 366 days

If you sell on day 366, which is one year and one day after buying, you pay significantly less capital gains tax than if you sell on day 365. That’s because at the one-year-and-one-day point, your profit is subject to long-term capital gains — not short-term. Uncle Sam rewards those who hold on to their investments for at least one year by lowering the percentage of profit you have to pay in tax. If you sell within a year, you’re taxed at a much higher rate.

If this at all sounds confusing, I highly recommend asking a tax adviser for help in understanding your tax obligations upon the sale of your home. But basically, unless you sell and have a capital gain equal to or greater than $250,000 (for a single person) or $500,000 (for a couple), then you won’t have to pony up for a capital gains tax bill. You fall within the safety net the government gives us now to protect your increased house value.