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One type of tax debt a person could end up having is a tax debt related to the federal capital gains tax. This is a tax on profits realized from the sale of certain assets. There are many types of asset sales this tax can apply to.
Does this include the selling of a home? It is possible for such a sale to trigger capital gains tax liability. However, many home sales that realize a profit will not trigger it. This is because federal tax law makes it so the tax only applies to the sale of a qualifying primary residence if the profits exceed a certain floor.
The amount of this floor is $250,000 for individuals and $500,000 for married couples. So, one of the things that could subject a person selling their home to the capital gains tax is if the price they sold the home at exceeded their initial purchase price by more than this floor. As a note, there are certain things that may be able to be subtracted from the profit level when determining whether the profits from a home sale exceed the limit, including home improvement expenses.
Another thing that would generally expose a home seller to this tax if they realized a profit from the sale is if the home they sold is not their primary residence. This is because the above-mentioned profit limits only apply to sales of primary residences. Specifically, for these limits to apply, the home sold had to have been the seller’s primary residence for two or more of the last five years. Special rules apply when a homeowner converts a secondary residence to a primary residence. Also, there are some special circumstances in which a home seller would be exempted from the two-year requirement.
As this shows, the rules regarding the capital gains tax and home sales are rather complex. Given this complexity, it is possible for disagreements to arise between a homeowner and the IRS over whether a given home sale did trigger the tax. Given how high a capital gain tax bill could be, what happens in such disputes can have considerable ramifications for a taxpayer. This underscores the important role having strong legal guidance can play for a person when they are in a dispute with the IRS over capital gains tax liability related to a home sale.