Capital gains and a home sale

Question: We sold our home a year ago and have chosen not to reinvest into the market due to the volatility. We did make a profit on this sale. Will we need to reinvest this money into the real estate market to avoid paying capitol gains tax? If so, how much time do we have? Are there any other options for us? Nikki, Boise, ID

Answer: No, you don't need to buy another home to avoid capital gains. Married joint filers can exclude up to $500,000 in profit on the sale of their home from capital gains tax. For single filers the capital gains tax exclusion is $250,000.

There are a couple of guideposts to meet in order to take advantage of the tax break, such as it must be your main home and you have lived in it for a minimum of two years. (I imagine you've been in it a lot longer since you sold at a profit.)

You can get more information from the IRS on the tax implications of selling your home here.

What you're recalling is an old rule made obsolete in 1997. Before then, the way to avoid capital gains on a home sale was to buy another, more expensive property within two years. (There was a separate, one-time option for those 55 and older; they could take an once-in-a-lifetime exemption of up to $125,000 in profits.) However, the Taxpayers Relief Act in May, 1997 dramatically changed the capital gains treatment of homes.

The bottom line: You can invest the money where you would like, from a savings account to the stock market to another home or you can spend the profit. It's your choice.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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