Will You Get a Big Tax Bill After Selling Your House?

While your house is a place where you live (and make mortgage payments on), it is also an asset that you own. If you sell your home at a profit, that means you have capital gains. And the IRS typically imposes taxes on capital gains.

However, there are special rules for primary homes. So whether you owe taxes will depend on whether you qualify for a capital gains exclusion as well as on exactly how much profit you made.

Here's how to determine if you'll owe taxes on your home sale

While you ordinarily have to pay capital gains taxes when you sell assets at a profit, there are special rules applicable to your house.

Specifically, if you are a single tax filer, you may be able to exclude up to $250,000 in gains from your home sale. That would mean that unless you made more than a $250,000 profit on the sale of your home, you would not have to declare any sale proceeds as income. And if you are married, you each get to claim a $250,000 exclusion, so you won't have to pay any taxes unless your profits from your home sale exceed $500,000.

Be sure you understand that this is profits. If you sell your home for $600,000, that doesn't mean you're going to be taxed -- it depends what you paid for it. If you had purchased the property using a $400,000 mortgage loan, you would have only made a $200,000 profit. So you would not owe capital gains taxes, no matter whether you were a married or single filer.

Do you qualify for the capital gains tax exclusion?

You qualify to exclude $250,000 or $500,000 in profits from a home sale only if you meet certain requirements. Specifically, you must:

• Have owned your home for at least two of the five years prior to the time of the sale. This is called the ownership test.
• Have used your house as your main or primary home for at least two of the five years prior to the time of the sale. This is called the use test.

These two years do not have to be consecutive. It's an aggregate. And they don't have to be overlapping. In other words, if you owned your house for two years of the last five and you used the home as a primary home for two of the last five years but these did not happen at the same time, you could still qualify for the exclusion.

Unfortunately, though, you are not eligible to exclude your capital gains taxes if you already used this exclusion for the sale of a different home in the two years before you sold your current property.

The good news is, this means many people don't end up getting a tax bill after selling a home. If you don't qualify for the exclusion, though, you are going to be taxed on the profits from your home sale. So be prepared to give the IRS a cut out of your bank account if this happens to you.