Selling Your House and Paying Capital Gains Tax: A Guide

If you sell a home that is your primary residence, you will have to pay taxes on the sale. The home must be at least two years old, you must have lived in it for at least two years during the past five years, and you must have owned it for at least two of those years.

One such tax to pay is the capital gains tax. Let's take a look at the requirements for this tax and how you pay it.

Ownership Rules

For the purposes of this tax, your house is considered a capital asset. This means that you will pay taxes on it like you would on any other asset. In order to avoid paying capital gains tax, you must own it for at least one year out of the last two years.

This means that if you move into your new home in January of year one, then you will start paying capital gains tax on the sale of the home after you move out in January of year two. By that time, you will have owned the house for at least one year, but you will have stayed in the house for just one year.

Taking a Look Back Test

The one-year test will be a bit easier to pass if you have already owned the house for two years. This is because you will be able to look back at whether you lived there for at least one year before the sale.

By the same token, if you will have owned the house for at least two years before you sell it, you will have to live in it for at least two years after you sell it for the one year test to be met.

Married Taxpayers vs. Divorced Taxpayers

Married taxpayers will be able to combine the periods of time that they owned the house and lived in it. This means that you might not have to stay in the house for one year after you sell it, if your spouse stayed in it for a period of time.

Divorced taxpayers will not be able to use their former spouse's stays as part of the one-year test. This is because you are only counting the time that you are married, not your former spouse.

Reporting the Gain

You will have to report the capital gains (or losses) on your tax form. In your tax software, you can input the sale price and the date of the sale, and the software will calculate the capital gains and losses after it knows the dates the house was owned.

You can also report the capital gains on Form 8949. This form works similarly to a ledger, with the sale price and date of the sale on one side and the amount of gain or loss on the other. The gain or loss from the house, as calculated by the tax software or Form 8949, will then be entered on the actual tax return.

Conclusion

If you are selling your home, you might want to look back and see if you are due a tax refund. In that case, you should work with a qualified tax professional to get your taxes in order and get a refund. You will have to report the sale on your taxes, but you might be due a refund that you can use to pay some bills.

If you are still confused about the tax process and need help filing your capital gains tax, Tottax is here to help. We offer an accountant service to help you make better financial decisions. Get in touch with us today to learn more.