Question: My husband and I might soon be moving for a job opportunity and will need to sell our house. We have been living in it for close to one year. Based off of the Zillow value I think we would make a small profit. We do want to purchase where we will be moving but it might not be immediately since this area is more expensive. How can we avoid paying taxes if we make a profit? We hope to use this towards a new home purchase (might just not be immediately)

Answer:

Understanding Capital Gains Tax on Home Sales and How to Minimize It

When you sell your primary residence in the United States, the profit you make—known as capital gains—may be subject to taxation. However, the IRS provides certain exclusions that can help you avoid paying capital gains tax on some or all of your profit.

Primary Residence Exclusion

The IRS allows homeowners to exclude up to:

To qualify for this exclusion, you generally must meet both the ownership and use tests:

  1. Ownership Test: You owned the home for at least 2 years out of the 5 years preceding the sale.
  2. Use Test: You lived in the home as your primary residence for at least 2 years out of the 5 years preceding the sale.

Since you've lived in your home for close to one year and are moving due to a job opportunity, you might not meet the full 2-year requirement. However, the IRS provides a partial exclusion for homeowners who sell their home due to a change in employment, health reasons, or unforeseen circumstances.

Eligibility for Partial Exclusion:

Calculating the Partial Exclusion

The partial exclusion is proportional to the time you owned and lived in the home. Here's how to calculate it:

  1. Determine the Shorter of:

    • The period you owned the home.
    • The period you used the home as your main residence.
    • The time between the last sale of a home for which you took an exclusion and the sale of this home.

  2. Calculate the Fraction:

    • Divide the number of months you met the ownership and use tests by 24 months.

  3. Apply the Fraction to the Maximum Exclusion:

    • Multiply the fraction by the maximum exclusion ($500,000 for married filing jointly).

Example Calculation:

In this example, you could exclude up to $250,000 of the gain from your taxable income.

Steps to Take

  1. Document Your Move:

    • Keep records of your job offer, employment contract, or any other documentation proving the move is job-related.

  2. Report the Sale on Your Tax Return:

    • Even if you exclude all the gain, you may need to report the sale on Form 8949 and Schedule D.

  3. Consult IRS Publication 523:

    • This publication provides detailed guidance on selling your home and calculating exclusions.

Considerations