What Is a Deferred Gain on Sale of Home?

Definition

A deferred gain on sale of a home is a repealed tax rule that enabled homeowners to defer paying taxes on the gains resulting from selling a home, provided certain conditions were met. This rule was replaced with a law that enables homeowners to eliminate some capital gains tax, rather than just defer it.

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Definition and Examples of Deferred Gain on Sale of Home

A deferred gain on sale of a home generally means that capital gains for real estate can be paid at a later date than when a taxable event is triggered, rather than in the tax year that the property is sold.

A previous tax rule formally known as the Rollover of Gain on Sale of Principal Residence allowed homeowners to rollover capital gains from the sale of a primary home if they met requirements such as purchasing a new home for at least the same price as the previous residence.

In that case, the cost basis for the new home would be adjusted by the deferred capital gain, as well as by any other relevant adjustments like real estate closing costs. For example, if you sold your home and gained $100,000 on the sale, you could have deferred paying taxes on it by applying that amount to the purchase of a new home.

Note

Now, instead of using this tax rule, homeowners can turn to another tax benefit for capital gains on the sale of their homes and essentially eliminate their tax obligation on up to $250,000 in gains.

For real estate used for business, it’s possible to still defer capital gains when a like-kind exchange is made, but this differs from a rule that applies to someone’s principal residence.

How Deferred Gain on Sale of Home Works

A deferred gain on sale of home, based on the repealed rule, worked by a taxpayer purchasing a new home for the same price or a higher value than their previous principal residence sold for. In that case, the capital gain from the previous home could essentially be rolled over to the new one.

For example, suppose a taxpayer bought a home for $100,000, then sold it for $200,000. That would result in a $100,000 capital gain, aside from any relevant adjustments. However, under the Rollover of Gain on Sale of Principal Residence rule, that capital gain could potentially be deferred.

If that taxpayer purchased a new home for $250,000, they could defer the capital gain and accordingly reduce their cost basis of the new home to $150,000 ($250,000 to $100,000 deferred gain).

Eventually, if the taxpayer sold the new home for, say, $300,000, without being able to defer the taxes further—such as if they then decided to rent going forward instead of buy a new home—then the capital gain (minus relevant adjustments) would be $150,000 ($300,000 sale price minus $150,000 cost basis).

Note

The Rollover of Gain on Sale of Principal Residence rule has been replaced by a rule that allows individual taxpayers to fully exclude up to $250,000 in capital gains from the sale of a principal residence, and $500,000 for a married couple filing jointly. This rule can potentially save taxpayers money, as they don’t have to defer the taxes to pay later, but they can potentially eliminate them.

What a Deferred Gain on Sale of Home Means for Individuals

The deferred gain on sale of home only has an effect on taxpayers who meet certain circumstances, such as if they had deferred capital gains and have not yet realized them due to purchasing their homes before the law was repealed.

Now, homeowners can often turn to the current capital gains rule for real estate that allows them to exclude up to $250,000 in gains for individuals and $500,000 for married couples filing jointly if they sell a property that meets relevant requirements, such as passing the ownership test. For example, the home must have been used as their main home for at least two out of the last five tax years before the sale of the home.

Key Takeaways

  • A deferred gain on sale of a home generally refers to a repealed tax rule that postponed tax payments from the sale of someone’s principal residence.
  • Now, homeowners can often entirely exclude larger amounts in capital gains from their tax burden rather than deferring them.
  • Deferred capital gains for real estate can still apply in some situations, like when a business property is sold as part of a like-kind exchange.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Bloomberg Tax. “Sec. 1034. Rollover of Gain on Sale of Principal Residence [Repealed].”

  2. U.S. Government Publishing Office. “26 U.S.C. 1034 - Rollover of Gain on Sale of Principal Residence.“

  3. IRS. “Topic No. 701 Sale of Your Home.”

  4. IRS. “Like-Kind Exchanges - Real Estate Tax Tips.”

  5. National Library of Medicine. “The Effect of Capital Gains Taxation on Home Sales: Evidence From the Taxpayer Relief Act of 1997 - PMC.”

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