One of the most often confused tax topics is also one of the biggest tax breaks in the entire tax code. That's right, let's talk about selling your home.
Millions of homeowners sell their home every year and most taxpayers are eligible to not pay any tax on the sale of their home. The actual tax code is fairly straightforward, if live in the home of 2 out of 5 years, a single taxpayer can exclude $250,000 (or married $500,000) worth of gains from capital gains tax.
There are some wrinkles if you don't meet the 2 out of 5-year rule or if you convert the property to a rental home and then sell. (Side note: this is a situation that I have seen mishandled several times and could easily cost a taxpayer thousands)
Other than the above, the rule is really straightforward, so how do taxpayers get confused? The most common misconception I get is that you have to sell your home and then roll the proceeds into another home to get the treatment. This is not true. Once you sell, the money is yours and you get the exclusion. The other misconception is that a lot of taxpayers don't even know about this rule. It pays to know the code!
Selling your home is maybe the biggest tax break in the code. I don't know many other sections where you can pocket $500,000 in income and not owe any tax.
JR Gramstad CPA