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Hello and welcome to Money Girl’s Quick and Dirty Tips for a Richer Life.
Today’s topic: More on how to sell your house tax free.
Last spring, I did a podcast episode about how to sell your house tax free. It’s a topic that I’ve received many questions about, so I’d like to take a moment to answer some of these questions in today’s episode.
A listener named Ted e-mailed in and asks:
Is the $250,000 capital gains exclusion a lifetime deal? That is, can I get five, $50,000 tax-free capital gains (spaced at least two years apart) in my lifetime or is the $250,000 exclusion for each transaction?
How the Exclusion Works
OK, let’s start out by re-capping how the exclusion on capital gains from the sale of your house works. When you sell your house, you can exclude up to $250,000 of the gain if you’re single and up to $500,000 of the gain if you’re married and file jointly, if you’ve owned and lived in the house for two of the previous five years. These limits apply to each transaction.
Use It as Many Times as You Like
This exclusion is a great tax break and you can use it as many times as you want. You simply must have lived in the house for two of the previous five years to be eligible for it. And the two years do not need to be consecutive, so there’s quite a bit of flexibility.
You could, for example, live in your house for at least two years, then rent it out and then sell it up to three years later and take advantage of the exclusion. If your profit is less than the $250,000 or $500,000 exclusion amounts, you pay no capital gains tax when you sell your house as long as you’ve lived in it for two of the previous five years.
Brad in Seattle e-mailed me with this related question. He asks:
Is there a rule in place stating that you can make one real estate sale without paying capital gains tax if you are age 62 or over?
Your Age Is Not a Factor
The answer is no. It’s not uncommon to mistakenly think that you can use the exclusion only once during your golden years, but this isn’t the case today. Before 1997, you were allowed a one-time capital gains exclusion of up to $125,000 if you were age 55 or older. But this rule no longer exists. The rules are actually much better now. You can sell your house, pay no tax on the gain up to the exclusion limits, and you can do it as many times as you like no matter what age you are.
And here’s one last question. A listener named Yousef wrote:
I purchased a condo 11 years ago as a primary residence and lived in it a little over two years. Then I moved to a bigger house and rented the condo out for over eight years. Now I’m selling it. Do I still have to pay capital gains tax since I purchased it as primary residence and lived in for over two years?
Remember, It’s Two of the Previous Five Years
The answer, unfortunately, is yes. You would have to pay capital gains tax on your profit and would not be eligible for the exclusion because, even though you lived in the house for two years, you did not live in the house for two of the previous five years.
You can either decide to pay tax on your gain or, if you have a big capital gain and the tax savings is worth it to you, you could move back into the condo for 24 months and then sell it to take advantage of the exclusion.
And because there is no limit to the number of times you can use the exclusion, you could sell your house, pay no tax on the profit, and then move into your condo for 24 months, sell it, and pay no tax on that profit either.
So remember, you can use the exclusion on the gain on the sale of your home as many times as you like as long as you’ve lived in the house for two of the previous five years.
Cha-ching! That's all for now, courtesy of Money Girl, your guide to a richer life.
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As always, everyone’s situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.
Send your questions or comments to money@qdnow.com or call them in to my voicemail line: 877-6-RICHER. Be sure to check out the other great Quick and Dirty Tips podcasts like Legal Lad. This week he’s talking about the difference between lawyers, prosecutors, and attorneys.
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