Buying a home is one of the biggest and most useful investments that you’ll make in your lifetime. Homeowners already know the many tax breaks that Uncle Sam offers, most notably mortgage interest and property tax deductions but what about Capital Gains?

You sell your home while the market is hot and it is looking like you will make a nice profit, then panic sets in as you realize that you might have to give a healthy percentage of that to the IRS in the form of capital gains tax. 

The good news is that many taxpayers can keep most - if not all - of that money! You may be able to exclude it from your taxable income thanks to the Home Sale Exclusion provided by the Internal Revenue Code.

Taxpayer Relief Act

The Taxpayer Relief Act of 1997 can help many people to hang on to the profit they see from the sale of their home. 

Up to $250,000 in capital gains($500,000 for a married couple) on the sale of a home is exempt from taxation if you meet the following criteria:

• You’ve owned your home for at least two years in the five years before you’ve sold it.
• Your home was your primary residence for at least two years of that same five-year period.
• You haven’t taken a capital gains exclusion for any other property sold at least two years before this current sale.

Calculating Your Cost Basis and Capital Gain

The formula for calculating your gain involves subtracting your cost basis from your selling price. 

Your purchase price — or “cost basis” — is what you paid for the house or property plus all the taxes and fees you paid when you bought it, typically from 2% to 5% of the cost. You can also include money spent on projects that added value to the property, like that extra bathroom or garage improvements.

On the other end of your investment, your selling price is what you sell your property for minus any commission or closing fees you pay to sell it.

Your capital gain would be the sales price of your home less your cost basis. If it's a negative number,you've had a loss. Unfortunately, you cannot deduct a loss from the sale of your main home. 

If the resulting number is positive, you made a profit. Subtract the amount of your exclusion and the balance is your taxable gain.

House Flippers And Homeowners Aren’t Equal