Home / Finance / When Can You Sell Your Home And Not Pay Capital Gains Tax?


There are times when you may want to sell your home but timing the sale is an important matter. Obviously, you don’t want to sell in a weak market if you can wait for prices to improve. And if you are going to use your equity to buy a new home you may wish to wait for interest rates to improve. And another one of the issues in selling a home may have to do with avoiding unnecessary taxes. Let us say that you and your spouse anticipated the housing bubble a decade ago and got out of the housing market before the bottom fell out. You rented and put your cash in the bank. Then, when property values bottomed out you bought a new home. And let us say for the sake of argument that you paid $150,000 for a home that previously sold for $400,000. Today the housing market has recovered and has especially recovered where you live. Your home is now appraised at $500,000. You want to sell and take a profit on this wise investment. And you are nearing retirement and going to downsize to a smaller and less expensive home. Because you are not going to put the proceeds from your home into a new residence you will have a cash profit from your wise decision. But, do you have to pay a capital gains tax?

Taxpayer Relief Act Of 1997

There has been a law on the books for two decades that should help you, especially since you are married. This law allows a single person to pay no capital gains tax on the first $250,000 of gain in selling a home. You can add another $250,000 for your spouse and your capital gain is not taxable.

Your home needs to be your primary residence for this law to apply and you have to have occupied your home for two of the last five years. This law does not help you when you buy and then sell for a large profit just a year later.

Thus, when you can sell your home and not pay capital gains tax includes having owned and lived in a primary residence for five years or more. There are other aspects of this law that allow you to convert rental property to a primary residence but this is where you need to consult your tax preparer for advice.

Age 55 Is No Longer A Magic Age For Selling Your Home

Prior to the 1997 Taxpayer Relief Act, a homeowner could sell their primary residence once they reached age 55 and have a one-time exemption from capital gains tax. The point of the law was that over the years inflation had greatly increased the dollar values of homes but inflation had also greatly increased the cost of living. The age 55 rule was meant to avoid penalizing long-term home-owners for inflation which was not their fault. The 1997 law was meant to accomplish the same goal.