Home > Mom's Life > Family Finances > Understanding Finances > Tax Benefits of Owning a Home

Tax Benefits of Owning a Home

In This Article:

Page 2

Capital Gains Exclusion

Show Me the Money

Capital gains are the profits from the sale of an investment or asset. Tax on this gain is usually due the year the asset is sold.

Pocket Change

The 1997 Taxpayer Relief Act was great news to persons under age 55 who wanted to sell their homes and buy smaller ones. Before this act, people who owned their homes for many years often had to pay high capital gains taxes at sale time.

Show Me the Money

A capital gains exclusion is an exclusion to the practice of taxing capital gains. It applies to those who sell their homes and are within the parameters set by the government: up to a $500,000 sum if married, $250,000 if single.

You've just moved into your house, so this section on capital gains might be a little premature. This information will be helpful someday, though. A capital gain occurs when you sell your home at a profit. Say you buy it for $100,000, keep it for a while, and then sell it for $200,000. You've made a $100,000 profit or capital gain. Most profits, such as those on many investments, are taxed for capital gains purposes. A portion of the capital gains from selling your home, however, is not.

Capital gains used to be bad news for taxpayers, who saw a big bite taken out of the money they made on the sale of a house. Fortunately, the Taxpayer Relief Act of 1997 made big changes in the capital gains taxes you pay on the sale of your house. The 1997 law says you can take a $500,000 exclusion on your income tax if you're married and filing jointly, or a $250,000 exclusion if you're single.

You can file for the capital gains exclusion every two years at any age, as long as you've used the property as your principal residence for at least two of the last five years. If you only own your house for one year, you can take a partial (50 percent) exemption. If you have to move because of unexpected or uncontrollable reasons, such as a job transfer or health reasons, you get to take the total exemption. It won't be prorated, even if you haven't lived in the house for two years.

Don't rush out and sell your house now that we told you about the $500,000 exemption. It sounds like a huge amount to be sure, but you'd be surprised at how quickly costs add up. Always save any receipts associated with fixing up or improving your house. This is smart in case you need them for an insurance claim. Saving the receipts also gives you a record of capital improvements for the calculation of any gain for your state income tax return. Note that although the IRS allows a $500,000 exclusion for capital gains on a house sale, your state's allowable exclusion may be considerably less.

<< Previous: Page 1

More on: Family Finances


Excerpted from The Complete Idiot's Guide to Personal Finance in your 20s and 30s © 2005 by Susan Shelly and Sarah Young Fisher. All rights reserved including the right of reproduction in whole or in part in any form. Used by arrangement with Alpha Books, a member of Penguin Group (USA) Inc.

To order this book visit the Idiot's Guide web site or call 1-800-253-6476.


Special Books for the Kids You Love
Celebrate 20 years of sharing love to the moon and back with the anniversary edition of Guess How Much I Love You, one of the world’s best-loved picture books. Plus, search our Book Finder for more great book picks. Brought to you by Candlewick Press.

Vote Now for the Children's & Teen Choice Book Awards
Voting is open now through May 3 for the Children's and Teen Choice Book Awards — the only national book awards program where the winning author, illustrator, and books of the year are selected by young readers. Encourage your child to vote for his favorites today!

Top 10 Math & Science Apps for Your Whiz Kid
Looking for the best math and science apps for kids? Check out these cool apps for all ages, which will grow your child's love of the STEM subjects (science, technology, engineering, and math).

Registered for Kindergarten — Now What?
Wondering what to do now that you've signed your child up for kindergarten? Try our award-winning Kindergarten Readiness app! This easy-to-use checklist comes with games and activities to help your child build essential skills for kindergarten. Download the Kindergarten Readiness app today!

stay connected

Sign up for our free email newsletters and receive the latest advice and information on all things parenting.

Enter your email address to sign up or manage your account.

Facebook icon Facebook icon Follow Us on Pinterest

editor’s picks