What Is a Deferred Gain on Sale of Home?

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.

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A deferred gain on sale of home, based on the repealed rule, worked by a taxpayer purchasing a new home for the same price or a higher value than their previous principal residence sold for.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).

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.