Selling a home can have significant implications for property tax obligations, particularly in regards to capital gains tax. Generally, homeowners are exempt from paying capital gains tax on the sale of their primary residence, provided they have lived in the home for at least two out of the last five years before the sale. This exemption applies to up to $250,000 of profit for single filers and up to $500,000 for married couples filing jointly. If the profit from the sale of the home exceeds these limits, the excess is typically reported as a capital gain on Schedule D of the tax return.
However, there are some exceptions to this rule. For instance, if the home was used for rental or business purposes, or if the homeowner took depreciation deductions, they may be subject to depreciation recapture tax. Depreciation recapture is taxed at a rate of up to 25% of the cumulative depreciation deductions claimed. Additionally, if the homeowner has not lived in the property for the required two out of five years, they may not be eligible for the capital gains tax exemption. In such cases, the homeowner may be required to pay capital gains tax on the entire profit from the sale of the home. It is important for homeowners to consult with a tax professional to understand the specific tax implications of selling their home.