The Tax Advantages of Owning your own Home

If you’re one of the many Americans that have decided to take on owning a home, you probably already know some of the tax benefits, such as that you can deduct your mortgage interest and property taxes. If you haven’t sold your first home yet, you might not know about the tax benefits when you sell your home.

When you sell a piece of real-estate, you’re supposed to pay capital gains on any increase in the value of the home during the time that you owned it. This is just like if you were to own a stock or a mutual fund. If you buy it, and the value of it goes up, and you sell it, you have to pay capital gains on it.

Fortunately Congress enacted a law which makes your primary resident exempt from the capital gains tax. According to the Taxpayer Relief Act of 1997, capital gains created from the sale of your primary residence all the way up to $250,000 are tax free. For married couples, the amount is $500,000. You also have to own your home for two years before you can avoid paying any capital gains taxes.

This generous tax-cut has made owning a home much more lucrative, and now many families are moving on a regular basis, buying low and hoping to sell high in a couple of years later. People who bought homes during housing market bubble which has come about in the last few years are finding that the increases they had hoped for aren’t there. Fortunately the housing market is cyclical and will likely return to those all time highs in the net few years.

Capital gains taxes are figured by taking the sale price of your house, and subtracting the closing costs, realtor fees, and your cost basis (the amount of money that you paid for your home in addition to any major repairs). Whatever is left over is the amount of capital gains that you have. If the number is under $250,000, or $500,000 if you’re married, you don’t have to pay a dime in capital gains taxes as long as you’ve owned your home for at least two years and you’ve lived in the house for at least two of the last five years.

If you have owned your home for less than two years, in almost all times it makes sense to wait until you have owned your home for at least two years. This way you’ll be able to avoid the long-term capital gains tax rate of 5% or 15%, depending on your tax bracket. If you sell your home within one year of purchase, you’ll have to pay your ordinary income tax rate, anywhere from 10% to 35%, depending on your tax bracket.

There are a couple of other exceptions to this rule. Couples who are divorced and are selling their home can take the full exemption of $500,000 when selling their home assuming the have owned their home for the last two years. Members of the armed forces who have to move can take the full exemption regardless of how long they have owned their home.