Capital Gain Home Sale Exclusion: How to Save on Taxes in 2023

Capital Gain Home Sale Exclusion: How to Save on Taxes in 2023

May 15, 2023 0 By Nicole

For many people, their home is their biggest asset. And when it comes time to sell, they want to maximize their return on investment. The good news is, if you sell your home for a profit, you may be able to exclude some or all of that gain from your taxes. Here’s what you need to know about the capital gain home sale exclusion and how it can save you money come tax time.

What is the Capital Gain Home Sale Exclusion?

As we near the end of 2021 and enter the new year, many homeowners are beginning to reflect on their property-tax bills from 2021 and wonder how they will reduce their tax liability for 2023. One option that many might not have considered before is the capital gain home sale exclusion. The good news is that this new possibility might just be the thing that helps you cut down on taxes next year.

What is the capital gain home sale exclusion? Simply put, it is a tax break that allows you to exclude some or all of the gain from the sale of your primary residence from your taxes. The exclusion is enacted into law as part of the U.S. Tax Code Chapter 11, Subchapter A, Section 1014.

How the Capital Gain Home Sale Exclusion Works

The 2021 tax year was a busy one for the federal government, and its inclusion of a number of new provisions speaks to the complexity of our tax system and the lengths that some taxpayers will go to avoid paying taxes. For example, the government made several changes to the treatment of capital gains, including the long-standing “home sale exclusion.”
You may have heard about the home sale exclusion before. It is a provision that allows homeowners to exclude from their income any capital gains earned when selling their primary residence. This means that if you sold your home for a profit, you do not have to report that capital gain to the IRS—you can exclude it.

The way the home sale exclusion works is that once you have sold your primary residence for a gain, the next step is to see if you have met the requirements for the home sale exclusion.

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When You Can and Cannot Use the Capital Gain Home Sale Exclusion

The Capital Gain Home Sale Exclusion (the “Exclusion”) applies to qualified home sales. If you sell your home and meet certain conditions, your capital gain from the sale is excluded from your income and, therefore, not taxed. If you have sold your home and met the conditions set forth by the IRS, you may exclude up to $250,000 of your net capital gain from your income. For more information, see Capital Gains and Losses.

To be eligible to use the capital gain home sale exclusion, you must meet both the residence test and the investment test. The residence test requires that you have lived in your home for a total of at least two years out of the five years prior to its sale date. The investment test requires that you have owned your home for investment purposes for a total of at least two years out of the five years prior to its sale date.

How to Maximize Your Savings with the Capital Gain Home Sale Exclusion

The Capital Gain Home Sale Exclusion allows you to exclude up to $250,000 in gains when you sell your residence. This means you won’t have to pay the capital gains tax that would normally apply when you sell your home. But remember, if you meet both the residence and investment tests, you can exclude $500,000 of your net capital gain from income. So, for example, if you sold your home for a $500,000 profit, you would only have to pay taxes on $250,000 of that gain.

In order to take advantage of this exclusion, you must meet both the residence test and the investment test. The residence test requires that you have lived in your home for a total of at least two years out of the five years prior to its sale date.

FAQs About the Capital Gain Home Sale Exclusion

If you sold your home in 2021, you may be eligible to exclude up to $250,000 of your gains from taxes. One caveat: You must have owned your home for two years or longer, and you must have used it as your main residence for at least two years of the five years leading up to the sale. Check out some of the FAQs about the capital gain home sale exclusion that we’ve compiled.

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Q: If I am single and live in my home with my child, do I still qualify for the capital gain home sale exclusion?
A: Yes. For you to qualify for the capital gain home sale exclusion, you must meet both the residence test and the investment test. The residence test requires that you have lived in your home for a total of at least two years out of the five years prior to its sale date. The investment test requires that you have owned your home for investment purposes for a total of at least two years out of the five years prior to its sale date.

Q: I’ve lived in my home for only one year. Can I still qualify for the capital gain home sale exclusion?
A: No. The residence test requires that you have lived in your home for a total of at least two years out of the five years prior to its sale date. You cannot meet the residence test if you live in your home for only one year and then sell it.

Q: I’ve lived in my home for two years, but my child has always lived there too. Do I still qualify for the capital gain home sale exclusion?
A: Yes. For you to qualify for the capital gain home sale exclusion, you must meet both the residence test and the investment test. The residence test requires that you have lived in your home for a total of at least two years out of the five years prior to its sale date.

For many people, their home is their biggest asset. And when it comes time to sell, they want to maximize their return on investment. The good news is, if you sell your home for a profit, you may be able to exclude some or all of that gain from your taxes. Here’s what you need to know about the capital gain home sale exclusion and how it can save you money come tax time.