Sellers Could Be Exempt From Capital Gains Tax

Up to $500,000 in profits from the sale of your home could be tax-free.

If you sell your home this year and profit big, you could be exempt from capital gains tax.

Married couples filing jointly can claim up to $500,000 dollars in profit tax-free, while single sellers or married couples filing separately can profit $250,000 without being taxed. A new provision for 2008: If you're married but your spouse dies, you can get a full $500,000 of gains tax-free if you sell in the year following your partner's death.

To qualify, you must have owned your home for at least five years and lived in the home for at least two of those five years.

For active duty military, exceptions apply. If you are deployed away from your primary residence, you can suspend the period of residence for an additional five years. That means military members only have to live in a home for two of the last 10 years to qualify for the tax benefits.

If you sell your second home, you only get the tax advantages if you've lived in it for two of the last five years. That is, unless you sell the home because of a change in health, place of employment or other "unforeseen circumstance." The maximum exclusion will be reduced in the third instance.

How Much Profit Did I Make?

You know you're eligible. Now, get ready to figure out how much money you made from the sale of your home. You'll need to know the selling price, the amount realized and the adjusted basis.

Selling price refers to the total amount you receive for the sale of your home. That means money -- and also mortgages or other debts that the seller assumes.

The amount realized is the selling price minus selling expenses -- commissions, legal and advertising fees, and mortgage points.

Adjusted basis means increases or decreases you have made to the value of your home. The "basis" is the cost of the home when you first purchased or built it. That includes what you paid for the property, as well as closing costs and settlement fees.

Your home's basis increases when you add home improvements that have a life of more than one year. Repairs and upkeep are not considered improvements. Decreases to your basis include depreciation, insurance payments you received for damages to your home and any home-related tax credits. For more information, see IRS Publication 523.

The amount realized minus the adjusted basis is the gain or loss on your home. If you gain more than the tax-deductible amount, you may be able to further reduce your taxable profit by submitting home improvement receipts with your taxes. Sorry, if you sell at a loss, you can't deduct the difference. But if you did a short sale and your lender forgave any mortgage debt, you can exclude that amount as income.

Always consult your tax advisor. For more information, visit the IRS Web site.

Next Up

5 Types of Neighbors and How to Handle Them

You may love your house, but getting stuck with bad neighbors may have you thinking about putting up a for-sale sign. Here are some tips on dealing with rude, sloppy or nosy neighbors, and even those mean ones with spite houses.

How to Refinish Hardwood Floors

It takes some elbow grease to refinish hardwood floors, but it's worth it. Hardwood floors add value to your home and provide a classic look that goes with any style.

What to Know About Capital Gains Tax

A little studying up on capital gains tax can mean more money in your pocket at the end of the day.

Tax Breaks for Homeowners

A huge benefit of being a homeowner is the ability to take advantage of a number of tax breaks. Check out the possibilities.

Owner Financing: When Sellers Lend Money to Buyers

What to know about this non-traditional way of financing a home purchase.

4 Updates For Home Sellers on a Budget

Improving your home will help it sell more quickly -- but this makeover doesn't have to cost a bundle.

Calculating Your Property Tax Bill

The tax amount you see on a listing might have nothing to do with how much your property tax bill will be after you buy the home. Here's how to crunch the numbers.

Moving Expenses: What's Tax Deductible?

If you move more than 50 miles for a new job, deduct your relocation costs.

Understanding Property Taxes and Assessments

Homeowners have to pay property taxes. Before you buy, know how your local property taxes and special assessments will impact your cost of ownership.

Sellers: What to Do When You Can't Find a Home Before Yours Sells

If you sold your house before you've found new digs, don't worry: You have options.

Go Shopping

Get product recommendations from HGTV editors, plus can’t-miss sales and deals.

On TV

Follow Us Everywhere

Join the party! Don't miss HGTV in your favorite social media feeds.