Selling your home is never easy, but there is some very good news for many taxpayers: an exclusion that eliminates most people’s federal tax liability on gain from the sale or exchange of their homes. In plain English: when you sell your primary residence, there is a good chance (but not 100% definite) that you may exclude up to $250,000 of the gain from the sale (if you file your tax return as a single taxpayer) and married couples may potentially exclude up to $500,000 assuming they file a joint return. There are several criteria to meet, however, in order to qualify for this tax-free income.
The seller must have owned and used the home as his or her principal residence for at least two years out of the five years before the sale or exchange. In most cases, sellers can only take advantage of the provision once during a two-year period.
Dependent on the circumstances, it may be possible to exclude some of the income even if you do not meet the 2-year test (or if you already used the exclusion within the prior 2 years). Some methods of qualifying for this provision include selling your home due to a change in place of employment, health, or other unforeseen circumstances (such as disasters, death, losing your job, divorce, etc.).
The rules get complicated, especially if the house was ever used as a rental or if you acquired the home in a tax-free exchange. Contact us for more details if you are considering selling your home or if you recently sold your home.