When Does a Home Sale
Trigger a Big Tax Bill?

Suzy: Don't worry. There's a good chance you won't have to pay capital-gains tax at all, and even if you do, it's still likely that you'll walk out a winner.

Here's why. Thanks to a 1997 tax law, married couples who live in a house for two out of the prior five years are excluded from capital-gains taxes for the first $500,000 of profit. For single persons, the limit is $250,000. Say the house is worth $250,000 the day you buy it. If you're married, the home's value would have to increase by 200% over the next two years before you pay capital gains. For the record, Seattle home prices rose 10.4% in the last two years, and the rate of appreciation has actually slowed over the last four quarters.

Even if you don't stay in the house the full two years, you might still be able to avoid paying capital gains. For example, if you have to leave because of a job, health problems or other unforeseen circumstances, there's a good chance you could qualify for a partial exemption from the capital-gains tax.

Of course, if you rent the house, that adds a new variable to the mix. If you live in the house a full two years before renting it out, it won't matter: You'll still get the maximum exemption. If you don't, you could wind up paying some capital gains when you leave. Even so, under the latest tax-cut plan approved by Congress, the capital-gains-taxation rate drops to no more than 15% from the previous 20%. And that's only 15% of your profit, meaning you get to keep the rest. "That, to me, is not getting hurt," says Gerald Marsden, a partner at Eisner & Lubin, a tax-consulting firm in New York.

The primary way you could lose is if you sell the home very quickly after buying it, though in that scenario the capital-gains tax is the least of your worries. You'll also be deep in the hole because of the numerous transaction costs that are involved in buying and selling a home, including a realtor's fee and the origination fee you pay to the lender for your mortgage. Short-term ownership of real estate is rarely a good idea, regardless of the potential capital-gains hit.