Here are some commonly asked questions dealing with taxes on the sale of your principal residence:
Q: We have lived in our house for many years, and now wish to sell it. It has gone up a lot in value since we bought it. Will there be any tax on the profits?
A: Yes. The law requires that you calculate any profit, called "long term capital gain," and pay tax on any gain which you are not eligible to exclude. Fortunately, you can probably exclude a lot.
Q: What are the rules?
A: The rules, found in Section 121 of the IRS Code, cover how you may qualify for the exclusion from taxation. In a nutshell, the law says that if you have owned and occupied your home for any two of the five years just before you sell, then you may exclude up to a quarter million dollars from taxation. If you are married, you can double that amount.
Q: So how do I calculate my profit?
A: First, you calculate your basis in the property, which is what you paid for it, plus any major renovations or expansions you made along the way (called capital improvements).
Next, you calculate your net selling price, which is the dollar amount on your sales contract, minus any allowable costs of sale, such as commissions and closing expenses.
Finally, your capital gain is determined by subtracting your basis from your net selling price. To make matters more complex, there are other considerations if you owned and sold a home under the old rules, so it's wise to let your accountant help with the calculation.
Q: Can you give me an example?
A: Let's say you bought a house ten years ago for $100,000. You performed only needed repairs while you lived there, but made no major expenditures. You lived there the whole time. Now you are selling for $175,000 with no commissions or buyer concessions.
Your capital gain would be $75,000, which is subject to taxation. However, since you have owned and occupied the house for at least two of the five years before the date of sale, you are allowed to exclude from taxation up to $250,000. Thus you would owe no tax on the sale of your home.
Q: Do I have to reinvest the money into my next house?
A: No, there are no restrictions on what you do with the profit. You may use it for any purpose you choose, and it need not be related in any way to your real estate. The amount of your excluded gain is truly tax-free.
Q: What if I owned a very expensive house and had a gain over $250,000?
A: Capital gains which are not eligible to be excluded are currently taxed at 15% for federal tax and 6% for the state of Georgia, for a total of 21%.
Q: If I happen to get married prior to the date of my home sale, would that have an effect on my tax?
A: Taxpayers who are married and file jointly automatically qualify for a double exclusion provided they live together in the house being sold, so it would be a good idea for your new spouse to move in before the sale. In that case, your exclusion amount would be boosted to $500,000, and the above capital gains tax would apply to any amount not excluded.
Q: How old do I have to be to take advantage of this exclusion?
A: You are remembering certain provisions of the old law which are no longer in effect. The new law became effective on August 5, 1997, but many people still think it applies in some circumstances.
You do not have to be age 55 to use Section 121. Any homeowner who owns and occupies their residence may qualify, regardless of age.
In addition, the new law replaced the "once in a lifetime" rule. The exclusion of capital gain in Section 121 can be used as often as once every two years, and there is no limit on the number of times it can be used.
Q: This exclusion seems like a pretty good tax break for homeowners. Is there a comparable deal for renters?
A: Only homeowners who meet the ownership and occupancy requirements of section 121 qualify for this exclusion. And yes, I agree that it's a powerful benefit of home ownership.
Q: Did anyone lose when this law took effect?
A: People who owned ultra high-end homes, worth millions of dollars, had previously been able to defer taxation by re-investing in a more expensive home within two years of their sale date. Now those high dollar sales are taxed on all non-excluded gains.
Q: Is there any other place in the tax code where it is legal to make profits and pay no tax on those profits?
A: You might say that the Roth IRA offers taxpayers the opportunity to earn profits inside their retirement account, then withdraw those profits later and pay no tax. Just as in the sale of your home, there are very specific rules governing retirement accounts.
Q: How can I learn more about taxes on the sale of my home?
A: Go to my website at 
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