How To Minimize Taxes When Selling Your Home

When you sell your house, you may be required to pay capital gains tax on the profit you make from the sale. However, there are a number of ways you can potentially avoid or reduce this tax, including the capital gains exclusion for your primary residence. Here’s how it works:

  1. Meet the ownership and use tests: To qualify for the capital gains exclusion for your primary residence, you must meet the ownership and use tests. This means you must have owned the property for at least two of the past five years, and you must have used it as your primary residence for at least two of the past five years. If you do not meet these requirements, you may still be able to claim a partial exclusion if you meet certain other conditions.
  2. Calculate your capital gains: To determine how much capital gains tax you may owe when selling your house, you will need to calculate your capital gains. This is the difference between your original purchase price and the sale price of your house, minus any selling expenses and any depreciation you have claimed.
  3. Claim the exclusion: If you meet the ownership and use tests and your capital gains are below the exclusion limit, you may be able to claim the exclusion to reduce or eliminate your capital gains tax. For 2021, the exclusion limit is $250,000 for single filers and $500,000 for married filing jointly.
  4. Report the sale on your tax return: When you sell your house, you will need to report the sale on your tax return. If you are eligible to claim the capital gains exclusion, you will need to report the sale on Form 8949 and Schedule D of your tax return. You will also need to complete Form 1040, Schedule 3, and claim the exclusion on Line 13.

By following these steps and working with a tax professional, you can potentially avoid or reduce capital gains tax when selling your house. It’s important to note that the tax implications of selling a house can be complex, and it’s always a good idea to consult with a tax professional to ensure that you are taking full advantage of all available tax benefits.

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