7/2/2018 Avoiding Capital Gains Tax When Selling Your Home: Read the Fine Print | Nolo.

com
Grow Your Legal Practice (/advertisers) Meet the Editors (/staff.html#editorbios) Sign In (/login) Support (/customer-support)

Avoiding Capital Gains Tax When Selling Your Home: Read the Fine Print
If you sell your home, you may exclude up to $250,000 of your capital gain from tax -- or up to $500,000 for married
couples.
By Stephen Fishman (//www.nolo.com/law-authors/stephen-fishman.html), J.D. (https://plus.google.com/share?
url=https%3A%2F%2Fwww.nolo.com%2Flegal-
encyclopedia%2Favoid-capital-gains-tax-
selling-home-29901.html)

(https://www.face
u=https%3A%2F%
encyclopedia%2
selling-home-29

Need Professional Help? Talk to a Real Estate Attorney.

Please answer a few questions to help us match you with attorneys in your area.
Please select area of real estate Select an answer

You probably know that, if you sell your home, you may exclude up to $250,000 of your capital gain from tax. For married couples filing jointly, the
exclusion is $500,000. Also, unmarried people who jointly own a home and separately meet the tests described below can each exclude up to
$250,000.
The law applies to sales after May 6, 1997. To claim the whole exclusion, you must have owned and lived RELATED PRODUCTS MORE 

in your home as your principal residence an aggregate of at least two of the five years before the sale
(this is called the ownership and use test). You can claim the exclusion once every two years.
But, even if you don't meet this test, you still may be entitled to a whole or partial tax break in certain
circumstances.

First, How Much Is Your Gain?

Many people mistakenly believe that their gain is simply the profit on the sale ("We bought it for $100,000 Neighbor Law Nolo's Essential
and sold it for $650,000, so that's a $550,000 gain, and we're $50,000 over the exclusion, right?"). It's Guide to Buying
(https://store.nolo.com/products/neighbo
not so simple -- a good thing, since the fine print can work to your benefit in such instances. law-nei.html? Your First Home

Your gain is actually your home's selling price, minus deductible closing costs, selling costs, and your tax utm_source=nolo-(https://store.nolo.com
essential-guide-
content&utm_medium=nolo&utm_camp
basis in the property. (Your basis is the original purchase price, plus purchase expenses, plus the cost of
capital improvements, minus any depreciation and minus any casualty losses or insurance payments.) related-products) to-buying-your-
first-home-
Deductible closing costs include points or prepaid interest on your mortgage and your share of the htbh.html?
prorated property taxes. utm_source=nolo-
Examples of selling costs include real estate broker's commissions, title insurance, legal fees, advertising content&utm_medium
costs, administrative costs, escrow fees, and inspection fees. related-products)
So, for example, if you and your spouse bought a house for $100,000 and sold for $650,000, but you'd
added $20,000 in home improvements, spent $5,000 fixing the place up for the sale, and paid the real
estate brokers at least $25,000, the exclusion plus those costs would mean you'd owe no capital gains
tax at all.
For more information, see IRS Publication 551, Basis of Assets
(http://www.irs.gov/publications/p551/ar02.html#d0e301), and look for the section on real property. Selling Your
House
If You Don't Meet the Use Test (https://store.nolo.com/products/selling-
your-house-
Now let's say that you still have some capital gains that don't seem to fall under the exclusion. Even if you
sell.html?
haven't lived in your home a total of two years out of the last five, you're still eligible for a partial exclusion
utm_source=nolo-
of capital gains (/dictionary/capital-gains-term.html) if you sold because of a change in your employment,
content&utm_medium=nolo&utm_camp
or because your doctor recommended the move for your health, of if you're selling it during a divorce
related-products)
(https://www.divorcenet.com/resources/divorce/capital-gains-tax-sell-house-divorce.htm) or due to other
unforeseen circumstances such as a death in the family or multiple births. ("I changed my mind about
living here" won't cut it.) In such a case, you'd get a portion of the exclusion, based on the portion of the
two-year period you lived there. To calculate it, take the number of months you lived there before the sale
and divide it by 24.
For example, if an unmarried taxpayer lives in her home for 12 months, and then sells it for a $100,000
profit due to an unforeseen circumstance, the entire amount could be excluded. Because she lived in the Featured Real Estate Law Firms In San
Jose, CA CHANGE LOCATION
house for half of the two-year period, she could claim half of the exclusion, or $125,000. (12/24 x
Goldblatt & Jitner LLP
$250,000 = $125,000.) That covers her entire $100,000 gain.
(http://nolo.lawyers.com/gilro…
law-firm-160587103-f/?
Nursing Home Stays domain=nolo.com)

For people who've moved to a nursing home, the ownership and use test is lowered to one out of five 5.0/5.0 100%
years in your own home before entering the facility. And time spent in the nursing home still counts 408-465-4257
toward ownership time and use of the residence. For example, if you lived in a house for a year, and then (tel:408-465-4257)
CONTACT
spent the next five in a nursing home before selling the home, the full $250,000 exclusion would be (HTTP://NOLO.LAWYERS.COM/GILROY/CALI
LAW-FIRM-160587103-F/CONTACT/?DOMAIN
available.
William B. Brinckloe, Jr., Esq.
Marriage and Divorce TransActionLaw.com
(http://nolo.lawyers.com/irvine…
Married couples filing jointly may exclude up to $500,000 in gain, provided: com-300005979-f/?
domain=nolo.com)
either spouse owned the residence
n/a
both spouses meet the use test, and no peer reviews

https://www.nolo.com/legal-encyclopedia/avoid-capital-gains-tax-selling-home-29901.html 1/3
7/2/2018 Avoiding Capital Gains Tax When Selling Your Home: Read the Fine Print | Nolo.com

neither spouse has sold a residence within the last two years. 949-502-0487
(tel:949-502-0487)
CONTACT
Separate residences. If each member of a married couple owns and occupies a separate residence and (HTTP://NOLO.LAWYERS.COM/IRVINE/CALIF
COM-300005979-F/CONTACT/?DOMAIN=NOL
files jointly, each may exclude up to $250,000 in gain when they sell. Also, if it's a new marriage and one
spouse sold a residence within two years before the marriage (thereby disqualifying him- or herself from Creech, Liebow & Roth
the exclusion), the other spouse may still exclude up to $250,000 in gain on a residence owned before (http://nolo.lawyers.com/san-
jose/california/creech-liebow-
the marriage.
and-roth-2749040-f/?
Double tax breaks? A new marriage may also double the tax break in some circumstances. Suppose a domain=nolo.com)
single man sold his principal residence on October 1 and gained $500,000 in profits. Let's also say that 4.6/5.0 n/a
he and his girlfriend had been living in the house for two years (but her name wasn't on the title), so they
877-629-2110
both satisfy the use test. If they get married by midnight December 31 of the same year, they can file a (tel:877-629-2110)
CONTACT
joint return for that year and exclude the entire $500,000. (HTTP://NOLO.LAWYERS.COM/SAN-
JOSE/CALIFORNIA/CREECH-LIEBOW-
Divorce and the tax break. Divorced taxpayers may tack on the ownership and use of their residence by AND-ROTH-2749040-F/CONTACT/?
DOMAIN=NOLO.COM)
their former spouse. For example, say that upon divorce, the wife is allowed to live in the husband's
residence until she sells it. He has owned the residence for 18 months. Once the sale occurs, the couple VIEW ALL › (HTTP://NOLO.LAWYERS.COM/REAL-
ESTATE/SAN-JOSE/CALIFORNIA/LAW-FIRMS/?
→
DOMAIN=NOLO.COMDOMAIN=NOLO.COM)
will split the profits 50-50.
If the wife sells the home nine months later, she may tack on her ex-husband's ownership to meet the
two-year ownership test. Also, the husband may tack on his ex-wife's continued use of the residence to
meet the two-year use test. Each one is entitled to exclude $250,000 of profits from the sale. Widowed
taxpayers may also tack on the ownership and use by their deceased spouse.

Reduced Exclusion for Second Home Also Used as Primary Home

As of January 2009, new tax rules require that, if you sell a home that you sometimes used as a vacation RELATED ADS
or rental property and sometimes as your primary residence, you're eligible for only that portion of the
capital gains exclusion that corresponds to the amount of time you actually lived there as your primary
residence. (The rest of the time is called "non-qualifying use.") Note that the calculation is made over
more than a mere five-year period -- it applies right back to January of 2009. What's more, if, during the
five years before the sale, you never actually made the home your primary residence, you're likely
disqualified from using the exclusion. (You won't be surprised to hear that this new rule was meant to
generate additional tax revenue, to offset some other tax cuts.)

Home Offices: A Tax Drawback

The exclusion does not apply to depreciation allowable on residences after May 6, 1997. If you are in a
high tax bracket and plan to live in your home for a long time, taking depreciation deductions for a home
office is quite valuable right now. But if not, you might want to reconsider using a portion of your home as
an office, because all depreciation deductions you take will be taxed at 25% when you sell the house.
Example: A married couple sells a home with an adjusted basis (/dictionary/basis-term.html) (purchase
price plus capital improvements) of $100,000 for $600,000. Over the years, they had taken $50,000 in depreciation deductions for a home office.

Sales Price: $600,000

Adjusted Basis - $100,000
Taxable gain = $500,000

Of that gain, $450,000 is tax-free; the $50,000 taken as depreciation deductions is subject to 25% capital gains tax.

Splitting Up Big Gains

If you expect huge gains from selling a house -- more than can be excluded from tax -- you should consider ways to divide ownership of the house.
For example, say a couple owns their residence together with their adult son (perhaps because they've given him a share). If he meets the ownership
and use tests as to one-third of the property, the son may sell his share for a $250,000 gain without incurring a tax. His parents could simultaneously
sell their share for $500,000 without tax, sheltering the entire $750,000 gain.

hare?
lo.com%2Flegal-
l-gains-tax-

(https://www.facebook.com/sharer/sharer.php?
u=https%3A%2F%2Fwww.nolo.com%2Flegal-
encyclopedia%2Favoid-capital-gains-tax-
selling-home-29901.html)

NEED PROFESSIONAL HELP ?

Talk to a Real Estate attorney.

Enter Zip Code Start

https://www.nolo.com/legal-encyclopedia/avoid-capital-gains-tax-selling-home-29901.html 2/3
7/2/2018 Avoiding Capital Gains Tax When Selling Your Home: Read the Fine Print | Nolo.com

Briefly tell us about

How It Works 1 your case
Provide your
2 contact information
Choose attorneys
3 to contact you

Copyright © 2018 Nolo ® (https://www.nolo.com/copyright-policy.html) Self-help services may not be permitted in all states. The information provided on this site is not legal
advice, does not constitute a lawyer referral service, and no attorney-client or confidential relationship is or will be formed by use of the site. The attorney listings on this site
are paid attorney advertising. In some states, the information on this website may be considered a lawyer referral service. Please reference the Terms of Use and the
Supplemental Terms for specific information related to your state. Your use of this website constitutes acceptance of the Terms of Use
(http://www.internetbrands.com/ibterms/), Supplemental Terms (http://www.internetbrands.com/ibterms/supplementallegalterms/), Privacy Policy
(http://www.internetbrands.com/privacy/privacy-highlights.html) and Cookie Policy (http://www.internetbrands.com/privacy/cookie-policy.html).

https://www.nolo.com/legal-encyclopedia/avoid-capital-gains-tax-selling-home-29901.html 3/3