Homeowners can exclude up to $500,000 from income taxes on the sale of a primary residence
Taxes can take a serious toll on a home sale, and will quickly eat into your profit if you are not setup properly. Fortunately for homeowners, the tax code recognizes the importance of home ownership by providing certain tax breaks when you sell a home that is your primary residence.
Amount of Exemption
Federal tax code allows a certain amount of the net proceeds from the sale of your primary residence to be excluded from taxation. For an individual, the exclusion is $250,000, and $500,000 for a married couple filing jointly. If the couple is unmarried or filing separately, each can claim the individual exclusion of $250,000.
Primary Residence Requirement
To exclude the allocated proceeds from taxation, the home must be your primary residence. In this case, a home is considered your primary residence if you lived in the home for at least 2 of the previous 5 years before the date of sale. The 24 months of residence can fall anywhere within the 5-year period and does not have to be a single continuous block of time. For married couples, each spouse must individually meet the residence requirement.
If you own or live in more than one home, there is a “facts and circumstances” test that will help determine which is your primary residence. The most important factor is where you spend the most time, but your postal address, voter registration card, tax returns, and driver’s license or car registration may also come into consideration.
Short periods of time away from the primary residence, such as a 2-month summer vacation, can still be counted toward the two years of residency. However, longer lengths of time away from the home will not count, such as a year long sabbatical in another country.
If you have a disability and are physically or mentally unable to care for yourself, you only need to show that your home was your residence for at least 12 months out of the 5 years leading up to the date of sale. In addition, any time you spend living in a care facility (such as a nursing home) counts toward your residence requirement, so long as the facility has a license from the state.
You can claim the exclusion on your primary residence as many times as you like, but you must own the property for at least two years and you cannot claim more than one exclusion for every 2-year period.
For married couples, neither spouse may have excluded gain on the sale of another home within the previous 2-year period.
Types of Homes That Qualify
The law makes no distinction between the types of home involved, as long as it is your primary residence. The home can be a single-family home, condominium, cooperative apartment, mobile home, houseboat, etc.
There are a few life events that may make your home sale eligible for a partial exclusion, even if you don’t meet the residence requirements.
If you accepted or were transferred to a new job in a work location at least 50 miles farther from home than our old work location, or if you had no previous work location and began a new job at least 50 miles away from home, or if either is true of your spouse or co-owner, you may qualify for a partial exclusion.
If you, your spouse, co-owner, or immediate family member are forced to move due to disease, illness, or injury, you may be eligible for a partial exclusion.
In some cases, and unforeseeable event such as death, divorce, unemployment, or disaster will qualify for a partial exclusion.
Additionally, you cannot claim the exclusion on a home you acquired through a 1031 exchange, or “like-kind” exchange (used for investment properties) within the last 5 years.