One of the largest purchases a person will make in life is their home. It also follows that the largest sale a person may make is the sale of their home after it is paid off (or it increases in value). However, some people facing the prospect of a windfall from a real estate sale may be skeptical because of the impending tax liability that comes with realizing profits.
However, the U.S. Tax Code allows for certain exclusions that could possibly save some of your profits from capital gains taxes. Essentially, when you sell your primary residence, you may exclude up to $250,000 in profit ($500,000 for married couples) from taxation if you satisfy certain requirements.
Essentially, you must claim the property as your primary residence and must have lived in it for two of the last five years before the sale. Moreover, the exclusion (termed the maximum exclusion amount) is based on how much profit you would realize, not just the amount of sale.
Even if you can’t satisfy the residential requirement, you may still be able to apply for a “reduced maximum exclusion.” This will enable you to profit from a sale based on a significant change in circumstances such as a change in employment, health issues or other unforeseen circumstances.
Nevertheless, if you are in the midst of selling your home and feel as if tax burdens may ruin what you may in mind for the profits, talking things over with an experienced tax attorney may ease your fears.