Capital Gains Tax on Primary House

The home where you live, according to the Internal Revenue Service (IRS) rules that must be recognized as a primary residence. And you must occupied the residence for at least two years as per rules by IRS.

If you buy a home and after some time due to rise in value, you sell it in a year later. For that you would have to pay the capital gain tax. You may owe the tax on the profit you earn from the primary house if it overcome the threshold and it remains in your custody for at least two years and it meets the primary residence rules. The single person can exclude approximately $250,000 while on the other hand the married persons file jointly and can exclude up to $500,000 of the value of gain. According to the said rule that allows the rental property to be converted into the primary residence, if you live in your residence for the two years, the requirements are not necessarily fulfilled in that period.

There are following four filing status along with the the tax rates:

Filing Status	0% Tax Rate	15% Tax Rate	20% Tax Rate
Single	Less than $40,000	$40,000 to $441,450	Greater than$441,450
Married filing jointly	Less than $80,000	$80,000 to $496,600	Greater than $496,600
Married filing separately	Less than $40,000	$40,000 to $248,300	Greater than $248,300
Head of Household	$ Less than 53,600	$53,600 to 469,050	Greater than $469,050

2021 Long-term Capital Gains Rates

Eligibility Criteria Of Exclusion

According to the IRS rules if you want to qualify for the exclusion (section 121) then you must also qualify for the use and ownership test too. You can consider yourself for exclusion only of you owned and use your primary residence or house for the period of two years out of five years before you make your mind to sell it. Another important thing is that you must meet the criteria of meeting the ownership and use tests prior to the period of five years or before the sale. If you sale another home that is not your primary residence within the period of two years, then you are not eligible for exclusion because you already excluded the gain on the sale another home.

Capital Gain on selling Primary House

To understand this concept, consider an example in which a married couple buy a house for the cost of $700,000 in 2016. After five years they find that the price of the home has increased significantly. They decided to sell it for the cost of $1.4 million, gaining the capital of $700,000 from the sale of the house.

As the couple have filed jointly, they qualified for the exclusion of $500,00 of the capital gain and the rest amount $200,00 subjected to the tax that is capital gain tax. Their combined amount falls them into the category of 20% tax bracket. Therefore, their capital gain tax was $40,000.

Reporting The Sale Of Primary House That Proceeds To The IRS

It is mandatory to report the selling of your house, If you acquired the form 1099-S that report the proceeds from the selling even the capital gain is excluded from the sale.

You need to report this transaction on your individual return.

This article is intended solely for informational purposes and does not constitute legal, financial, or professional advice. Readers are advised to consult professionals in the relevant fields before taking any action to obtain personalized advice.

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