Your home is one of your most interesting assets when it comes to income taxes. It’s easy to avoid paying taxes on most (or all) of the profits once you’ve sold it, and you can even turn home ownership into a tax-free source of income.

When you sell your home, you can exclude a big chunk of the gain—$250,000 per person or $500,000 per couple— as long as you meet certain guidelines. You must own the home and must have lived in it for at least two of the last five years.

Because the amount you can exclude is so high, none of the profit resulting from a home sale would be taxable in most areas of the country. Even after decades of appreciation, it’s unlikely you’ll make more than $250,000 when you sell your home.

But in big, crowded cities, space is precious. Properties cost more and appreciate faster, and the gains could possibly exceed the $250,000/$500,000 limits in five years or less.

Tips to reducing gains

To reduce the gains when you sell your home, keep careful records of the costs of all improvements made that will increase the value of the home over the long term. Improvements that fall under this category include landscaping (as opposed to routine gardening); adding on rooms; installing a pool; remodeling a kitchen, bathroom, or other room; making modifications to accommodate disabled residents; and installing a new roof (as opposed to sealing up leaks). The better your records are, the easier it will be for you to prove the increase to your original basis, or tax cost.

When you sell your home, some of your selling costs will reduce your profits. These include paying real estate commissions, paying the buyer’s points, and paying for a buyer’s home repair policy and title policy. Keep all the receipts for anything that doesn’t appear on the HUD-1 statement.

How else can you reduce the taxes on the profits?

Plan the sale to take place in a year where your taxable income puts you into a tax rate of 15 percent or less. That way, most or all of your gains will be tax-free.

You can also consider gifting or selling part of the home to other adult members of the family who live there. (There is nothing in the Internal Revenue Code section 121 to prevent partial owners from getting a full exclusion for their share of the home.) If each person is able to exclude $250,000 of the gain, you might be able to exclude all the gain on the sale. Discuss this with your tax professional first.

If you choose to donate the home, you can do so in one of two ways. You can donate the house to a charity directly, or you can donate it through a remainder trust. That way, you never report the gain at all. You get a charitable deduction for part of the value of the home, but you get to live in it until you die.

Of course, you can simply live in the house until you die. Then your heirs will get the house with a tax cost based on the market value on the date of your death. They won’t have any capital gains taxes, and you would never have to pack up and move!

Eva Rosenberg, EA is the publisher of ®, where your tax questions are answered. She is the author of several books and ebooks, including Small Business Taxes Made Easy. Eva teaches a tax pro course at and tax courses you might enjoy at

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