I’ve had a few folks ask me recently about the possibility of being required to capitol gains taxes on real estate that they own, so I thought I would do a quick primer for everyone. Please note that this is for general information purposes only and is not intended to be personal tax advice. There are many exceptions to the rules and the rules frequently change. You should seek advice from a qualified tax professional to verify this information.
For starters: IRC section 121 says that a taxpayer can exclude from his taxable income some or possibly all of the gain that is realized on the sale of real property, provided that it is his or her principle residence. Generally you would have to have owned the property at least two years, and have lived in the property at least two years out of the last five years. Single persons can exclude up to $250,000, unrelated persons who share interest in the home can exclude up to $250,000 each, and married persons filing a joint tax return can exclude up to $500,000.
You can take this exclusion each time you sell your home, provided that you are fully qualified for the exclusion, and you don’t take it more than once during a two year period. You may be able to claim the exclusion for less than two years if you qualify for health reasons, or if the location of your job changes.
If you have a rental that you would like to move back into in order to avoid paying capitol gains taxes, you might be able to do so, depending on how you acquired the property, and how long you’ve lived in the property. In order to answer these questions, you need to speak with a qualified tax professional.
For more information, check out this IRS page that explains this information or speak to your tax professional.