Are there tax consequences to selling a home?

The real estate market is beginning to show renewed signs of strength, and for many current homeowners, the summer months and an uptick in buyers represents the perfect conditions to sell their home. Accepting a purchase offer from a buyer can be a seller's dream come true, but many often wonder if any gains they make on their sale will carry tax implications. 

The Internal Revenue Service offers an exclusion to sellers who meet certain eligibility guidelines, meaning that they may not have to pay taxes on the sale of their home at all. Currently, qualifying individuals can exclude up to $250,000 of their home gain from their income, or $500,000 if they are married filing jointly. However, to qualify for the exclusion, homeowners must meet both the ownership test and the use test as dictated by the IRS. In order to pass the ownership test, taxpayers must have owned the home they are selling for at least two years - 730 days or 24 full months - during the five years prior to the date of the sale.

Second, individuals must also pass the use test, which requires that owners must have used the home as their principal residence for at least two of the five years prior to the date of sale.

Lastly, it's for sellers to understand that the previous rule - which only allowed those over age 55 to take a one-time exclusion on a home sale - is no longer in place. Now, individuals can qualify for the exclusion as many times as it warrants, assuming that they meet the other tests and criteria. 

What if you don't meet these requirements?
Generally, those who fail to pass one or both of these tests may find that their gain is taxed as a short-term or long-term capital gain, depending on whether individuals owned the home for less or more than one year. Current tax rules dictate that for a home sale to be taxed as a short-term capital gain, it must have been owned for one year or less, while sales may be taxed as long-term capital gains if individuals owned the home for more than one year. Regarding capital gains, it's also important for owners to remember that their income plays a role in how their sale is taxed. For example, if a person's income is above $200,000 - or $250,000 for married joint filers - the gain may also be subject to the 3.8 percent Medicare surtax due to new rules that went into effect on January 1, 2013. Those who are exempt from capital gains on their home sale are not required to pay the surtax, regardless of their income levels. 

There may be special rules for certain individuals or those who face unique circumstances - such as military members or those who must sell their home due to an employment change - so it's important to consult a tax preparer when undergoing the selling process. 

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