This is one of the more common questions that I hear every year. I imagine with the recent hot real estate market it will be even more common this coming tax season. The answer to this question, like many other questions in the tax field, is that it depends. Section 121 of the Internal Revenue Code addresses the sale of personal residences and the tax treatment of any gains. If you have owned and lived in your home for two of the last five years you will be eligible to exclude a portion of your gains. The amount of that exclusion depends on your filing status.
Married filing jointly filers will be able to exclude $500,000 of any gains and single filers, head of household, or married filing separately filers will only be able to exclude $250,000 each. The IRS defines a gain on the sale of your personal residence as the difference between your “cost basis” and the “contract sales price” of your home.
The “cost basis” is what you paid for the home when you bought it, plus certain closing costs at the time of purchase, plus any capital improvements that you have made over the years. The “contract sales price” refers to the price that you and the buyer have agreed upon. The gain is then calculated by subtracting the “cost basis” from the “contract sales price”. However, you will still need to take into account and deduct selling expenses such as realtor commissions, attorney fees, and any costs to ready the property for sale. Once you have calculated your gain you can then apply the exclusion and for most taxpayers, this will mean that they will end up with no taxable gain on the sale of their home.