Understanding IRS Taxation Rules for Your Primary Residence

Owning a home is a significant milestone for many individuals and families and often forms a significant component of wealth and retirement strategies.

Understanding the IRS taxation rules for your primary residence is crucial for homeowners looking to buy or sell their property.

By familiarizing yourself with the criteria for capital gains exclusion and proper reporting procedures, you can navigate the tax implications effectively and potentially minimize your tax liability. Remember to stay informed about current tax laws or simply contact the team at US Global Tax.

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The first key point is that the IRS applies a capital gains tax to profits made on the sale of your primary residence.

The Internal Revenue Service (IRS) has specific rules regarding the taxation of capital gains from the sale of your home. Here's what you need to know to navigate the tax implications effectively.

One of the key benefits for homeowners is the capital gains exclusion that the IRS provides. As of 2024, a single taxpayer can exclude up to $250,000 of capital gains from the sale of their primary residence, while married couples filing jointly can exclude up to $500,000. To qualify for this exclusion, certain criteria must be met:

1.???? Ownership and Use Test: You must have owned the home for at least two of the past five years and used it as your primary residence for at least two of the past five years. These do not need to be consecutive years.

2.???? Frequency Limit: The capital gains exclusion can be claimed once every two years. This means that if you sell a home and claim the exclusion, you must wait two years before being eligible to claim it again.

3.???? Special Circumstances: Certain situations, such as job relocation, health reasons, or unforeseen circumstances, may allow you to prorate the exclusion if you do not meet the full two-year requirement.

It's important to keep accurate records of the purchase price, cost of improvements, and other expenses related to your home, as these will factor into calculating your capital gains. Additionally, any profit above the allowable exclusion amount may be subject to capital gains tax at a rate determined by your income level.

To report the sale of your primary residence to the IRS, you will need to complete Form 8949 and Schedule D of your tax return.

If this applies to you we strongly suggest that you contact the team at US Global Tax, who can advise you accordingly.