If you’re selling your home, you likely just want to get it over with and get started on the new chapter in your life in your new home. But hold on – you may have to deal with the tax man. If you made a profit on the sale of your home, you may to pay capital gains taxes. Having some understanding of the pertinent tax rules can help you minimize your tax bill. So let’s take a look at the tax implications of selling your home in Alabama.

The Likelihood of Paying Taxes on the Sale of Your Home

Your home is considered a capital asset by the IRS. If you sell it for more than you paid, the profit is known as a capital gain, which may be taxable. With the significant rise in home prices in recent years, many homeowners are seeing larger profits, increasing the chance that a portion of their gain could be taxed.

Fortunately, the IRS provides a significant tax break for homeowners. The primary residence exclusion allows you to exclude a large portion of the gain from your taxes. If you qualify, you can exclude up to $250,000 of the gain if you’re a single filer, or up to $500,000 if you’re married and file a joint tax return. Most homeowners who meet the criteria will not have to pay any tax on their home sale.

How Capital Gains Taxes Work

A capital gains tax is a tax on the profit you make from selling a capital asset, such as real estate, stocks, or other valuable items. The taxes are paid when you file your income tax return for the year in which the asset was sold.

The amount of tax you pay depends on how long you owned the home. The IRS distinguishes between two types of gains:

Long-Term Capital Gains: If you owned the home for more than one year, the profit is a long-term gain. This is beneficial, as it’s taxed at lower rates—typically 0%, 15%, or 20%, depending on your total income and filing status.

Short-Term Capital Gains: If you owned the home for one year or less, the profit is considered a short-term gain. It is taxed at your ordinary income tax rate, which is the same rate as your salary or wages.

How to Avoid Capital Gains Tax

When selling your home, you may indeed be subject to capital gains taxes, but the IRS To take advantage of the $250,000/$500,000 exclusion, you must meet several qualifying criteria set by the IRS. These are often referred to as the Ownership Test, the Use Test, and the Look-Back Test.

The Ownership Test: You must have owned the home for at least two of the five years leading up to the sale date. For married couples filing jointly, only one spouse needs to meet this requirement.
The Use Test: The home must have been your principal residence for at least two of the five years before the sale. Unlike the ownership test, both spouses must meet this requirement if filing jointly to claim the full $500,000 exclusion.
The Look-Back Test: You cannot have claimed the exclusion on the sale of another home within the two-year period before the current sale.

If you believe you qualify for this exclusion, it’s a good idea to confirm with a Alabama agent. To learn more, call 251-312-5100.

Special Circumstances

Even if you don’t meet all the criteria above, you may still be able to claim a partial exclusion. The IRS allows for exceptions in certain qualifying situations, including:

Having your previous home destroyed or condemned

A change in health or place of employment

Gaining ownership of the home during a divorce or separation

The death of a spouse during your ownership period

Being an active service member during your ownership

Get Professional Assistance

Navigating capital gains tax rules and exclusions can be complicated, and making a mistake can be costly. It’s always a wise decision to consult with a tax professional who can help you assess your situation, calculate your basis correctly, and ensure you take advantage of all available tax breaks.

In addition, working with an experienced Alabama investor can simplify the selling process. An investor familiar with local tax regulations can provide valuable guidance and help you achieve a quick, hassle-free sale. By working with professionals, you can make informed decisions that align with your financial goals. If you have concerns about the tax implications of selling your home in Alabama, be sure to contact us at 251-312-5100.