Tax Free Sale of a Residence

The housing market in the US is finally starting to kick back in high gear, after a few years stalled on the wayside. With this recent shift in the real estate market, a review of the taxes (and appropriate tax breaks) associated with home sales is in order.

Primary residence tax break applies to anyone selling a principal residence. It allows sellers to enjoy a large portion of their profits, up to $500,000 for married couples who file jointly (half that for singles), tax free. Any profit above that amount is subject to long-term capital gains taxation rates. Currently, that rate is 20% to 23.8% on similar capital gains.

This tax break excludes the cost of the home and additional improvements, and only apples to profits. For example, if a married couple purchased a home for $200,000 and completed $50,000 in improvements, the "cost basis" for their home would be $250,000. With the additional $500,000 tax break, this couple could sell their home for as much as $750,000 before they would owe federal tax on the sale.