I’ve had some people tell me they’d like to move, but they think they have to wait for their two year anniversary before they can sell to avoid paying capital gains tax on the sale of their principal residence.
The good news (if you choose to call it this), is that your actual gain is probably less than you think. Most people just take their sales price and subtract what they paid and assume they will be taxed on all of that gain. As I mentioned in my last article, you get to subtract your buying and selling expenses, as well as improvements you’ve made to the home (don’t forget upgrades if you bought a new home). This can reduce your taxable gain in a hurry!
For example, let’s say you bought a home for $450,000 a year ago, and it is now worth $500,000. At first glance you might think you would be taxed on the appreciation of $50,000 if you were to sell prior to your two-year anniversary. In fact, after working through your allowable subtractions, your taxable gain might only be $15,000 or so. So you may still owe capital gains taxes on that amount, but it could be quite a bit less than what you were expecting.
In addition, if the reason for your move is an “unforeseen” circumstance as defined by the IRS and it’s one that they make allowances for, you can reduce your capital gains tax even further or avoid it altogether! You will qualify for a reduction if you are moving due to a change in employment, health, divorce, etc. There is even an exclusion in the event that you are blessed with twins or triplets which forces you to buy a larger home.