Bill and Mary. A married couple, they sold their primary residence last year and made a profit. The profit they made on their home sale is subject to a federal capital gains tax—enter the capital gains tax exemption.
The profits Bill and Mary earned on the sale of their home are not taxed because they qualified for a capital gains tax exemption.
Simply put, the capital gains tax is the tax you pay on the profit from selling your home.
Here are some other facts about capital gains taxes:
◾With the home-sale exemption you can exclude up to $500,000 of any profits from your capital gains taxes as a married couple and up to $250,000 as an individual.
◾You can add capital improvements (money spent on improving the value of your home) to the cost basis of your home. This, in turn, lowers the total profit you pay taxes on.
◾In order to take the home-sale exemption from your capital gains taxes, the property you’re selling must be your principal residence.
◾There is no limit to the number of times you take the home-sale exemption from your capital gains taxes.
These are only a few things to know about the capital gains tax exemption and selling your home.
Be sure to get all the details about how capital gains affects you. Go to http://www.irs.gov/pub/irs-pdf/p523.pdf