Real Estate

How Much Time After Selling A House Do You Have To Buy A House To Avoid The Tax Penalty?

Published on: September 15, 2023

Last Updated on: November 14, 2023

How Much Time After Selling A House Do You Have To Buy A House To Avoid The Tax Penalty

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For someone who always wants to stay ahead in managing their finances, it is crucial to know about different tax penalties. One of them is associated with the housing market. Buying and selling houses can also put you under unavoidable tax penalties if you are not paying attention. 

Most importantly, if you are not buying a house soon after selling your previous one, you might be obligated to pay capital gain taxes. So, how much time after selling a house do you have to buy one to avoid the tax penalty? 

As a homeowner who is selling or willing to sell their house to buy another, you must be curious. I suggest you review this article to stay informed and avoid unnecessary tax penalties. 

What Is The Tax Penalties When Selling A House?

What Is The Tax Penalties When Selling A House

Before I tell you how long you have, you must know about taxes and tax penalties on capital gains. You might have to pay a specific amount in taxes if you sell your house and do not buy one after selling it for a specific period. 

The IRS outlines capital gains taxes as taxes people incur after gaining profit by selling a capital asset or property like a house. But what is the capital gain? 

Capital gain means the difference between the selling price and the adjusted cost basis (usually the original purchase price for the property) with added costs related to any improvements someone made. 

The capital gain tax amount depends on the profit someone has made by selling their capital asset and on their tax brackets. 

However, just because there is a capital gain tax associated with selling a house does not mean you cannot escape it. But for that, you have to have lived in the property for two years of the last five years of owning the property. It needs to be your primary residence for the said period of time if you want to leave the house.

Also, there is a limit up to which you can exclude your tax penalties. You will gain an exclusion allowance of up to $250,000 as a single owner. However, a married owner who files taxes jointly will have a $500,000 tax penalty exclusion. 

However, there is a question that bothers house owners – how to save capital gain tax on the sale of residential property? Well, you have to buy a property for that first. There is a specific time period before which you have to purchase a new property to escape capital gain penalties on profit made from selling your North Carolina home.

How Much Time After Selling A House Do You Have To Buy A House To Avoid The Tax Penalty?

After selling a house, a house owner gains some amount of profit that might incur capital gain taxes. A seller can avoid tax penalties up to the amount mentioned in the section above. 

However, they do have a specific time frame before they complete their purchase. 

According to the IRS, the house owners have two years before they purchase another house that costs the same as the previous house’s net selling price. 

The net selling price is the selling cost of the house with different expenses excluded from it. Such exclusions are –closing costs and real estate commissions. 

However, there is still some good news for homeowners who have sold their houses and are waiting to buy a new one. The IRS states that they have two years of time before they buy a new house to escape tax penalties. According to the IRS, it is still one of the safest options for them to get a new house.

Thanks to this provision, the sellers can easily buy another house in two years. Also, if the sellers miss the time period and are in the process of buying a house, they can extend the provisions period. So, it is not a strict deadline.

According to this provision, sellers do not have to pay taxes before they buy a new house within two years. If you are missing the mark of two years, then you can still extend the provision, thereby escaping the tax penalty. 

However, if you still have some doubts about the provision period and up to which you can extend it, consider discussing it with a tax professional. You can understand the tax penalty. 

How Does The Tax Penalty Work?

How Does The Tax Penalty Work

First, it is important to understand how the tax penalty works during the sale of a house. After that, you can look forward to how to avoid tax penalties. 

Homeowners may be eligible for tax penalty under IRS section 121. They can claim $250,000 for a single person and $500,000 for a married individual. According to this, any profit generated from selling a house under this price as a single homeowner or as a couple does not have to pay any penalty tax. 

However, as explained before, the homeowners need to have lived for 2 of the last years of five years of owning that property. However, if they are failing to do this, they have to follow more things you need to follow. If they fail to do this, they may owe capital gains tax on any profit. 

However, if they have not lived in the house for that said period or the selling price exceeds the said number, then they are liable to pay that penalty tax. 

Timeframe To Follow For Buying A House

If a homeowner is trying to purchase a new residential property, they should have lived there for the last two years. Also, they should buy the new property within the two years of provision period after selling their own house. So, if the homeowner wants to avoid their tax penalty, they have to live in their property for that period of time and also buy the new property to avoid taxes for two years. 

Bottom Line

How much time after selling a house do you have to buy a house to avoid the tax penalty? You should not have a problem understanding this time frame once you have read this article. 

However, if you have any queries related to this, you can let us know through the comment sections below. Thank you for reading.

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Shahnawaz Alam

Shahnawaz is a passionate and professional Content writer. He loves to read, write, draw and share his knowledge in different niches like Technology, Cryptocurrency, Travel,Social Media, Social Media Marketing, and Healthcare.

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