This old house? What are the tax implications of selling your home?

6a00d834515c5469e2019b01225958970d-500wiSo a couple months back I was talking to a resident about his plans after residency. He had purchased a home where he did medical school and residency and was now looking at options because he was afraid of the capital gains taxes that may be associated with selling. He had thought about renting but did not want the extra work, especially since he was moving several hours away.

He had been told by someone that he would have to sell his home and then turnaround and purchase a home to avoid paying taxes. So while we chatted, I pulled up the boglehead forum for a quick read and to our surprise he would likely not have to pay capital gains provided his home did not appreciate greater than 500,000 dollars over his purchase price (he joint files so both his wife and him can claim 250,000.)

To verify, we went straight to the source: Uncle Sam’s IRS page: (Publication 523 has all the “fun” reading if you are so inclined). Otherwise here are the high points for anyone making that transition and looking to sell their home.

1. You must have spent at least the last two years in the last five in your home as a primary residence. If you utilized a first time homebuyer credit you need to have stayed 36 months, otherwise you have to pay back that credit.

2. You can exclude up to 250,000 per filer for the sale of the home (500,000 for joint filers).

3. You do not have to file taxes on it if the gain is less than the number in point 2. Otherwise, you have to file and pay taxes on the amount above said number.

4. You cannot deduct a loss from the sale of your main home.

5. If you have more than one home you can only exclude a gain from your main home (where you live the majority of the time). You cannot deduct the gain off of your other home. So if you decide to keep the home as a second home (not a rental, which comes with more issues if you later decide to sell) you cannot exclude the gain if you decide to sell after you have made your new home your main residence.

Hope this short recap helps anyone that is figure out what to do with your home. Unfortunately, there will be many new realtors pressuring you to buy a new home when you come out of residency because it will save you taxes. As noted above, excluding gains on the sale of your home has nothing to do with making a purchase of a new home (with the exception of point 5). I suggest that you wait unless you know that you will not move for the region even if you hate your job.


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