Home Sale Exclusion

• The IRS says that single taxpayers can exclude up to $250,000 worth of gains realized from the sale of a home and that married taxpayers filing joint returns can exclude $500,000 worth of gains. A seller can only exclude the gain if he meets certain usage and ownership guidelines. A seller must have owned a home for at least two years during the five years prior to the sale and must have lived in the home for at least two years during the five years prior to the sale to qualify for the exclusion. If a homeowner is eligible for the exclusion and the maximum exclusion exceeds his gain, he does not have to report the gain on his income tax return.
  
  

Determining Gains

• For tax purposes, the gain a home seller realizes is the difference between the amount realized from a sale and the adjusted cost basis of the home. The IRS states that the amount realized is the final sale price of a home minus selling expenses like legal fees, advertising fees and commissions. The adjusted cost basis of a home is the original purchase price of a home increased and decreased by certain amounts. Expenses that add to the value of a home, like the cost of home improvements, are added to the original purchase price when figuring the adjusted cost basis.
  
  

Capital Gains Taxes

• If a homeowner can't exclude all of the gains realized when selling a home, she must report the non-excluded gains to the IRS and pay capital gains taxes on the profit. The capital gains tax rate for assets held longer than a year caps at 15 percent while the capital gains tax rate for assets held less than a year is equal to a taxpayers normal income tax rate.
  
  

Considerations

• The exclusion on gains from the sale of a home can only be used once every two years. The IRS says that a seller cannot take the exclusion if he took the exclusion on a different home during the two-year period ending on the date of the sale of a home.