If you own your home and are thinking of selling, it can be important to understand the home sale tax exclusion so you can maximize your tax benefits. Did you know your exclusion may be up to $250,000 in capital gains if you are single, or up to $500,000 if you are married? Numbers like these make it worthwhile to take a closer look at the home sale tax exclusion.
Let’s begin with eligibility. Perhaps you are wondering how to qualify for the home sale tax exclusion? Good news: You do not have to do anything special to qualify. A married couple with under $500,000 in capital gains that files a joint tax return will not have any tax liability on the sale of the home. And what exactly is meant by capital gains? It is the amount of appreciation your home has had since you purchased it. So, if you bought your house for $300,000, you could sell it for up to $800,000 now and avoid capital gains tax liability because the difference is under $500,000. (If you are single, or married but file separately, a home you purchased for $300,000 can be sold for up to $550,000 without any capital gains tax liability.)
While you don’t have to do anything special to qualify for the home sale tax exclusion, the home in question must be your primary residence and you must meet what is called the 2-2 Rule:
- You have owned the home for 2 out of the last 5 years (“ownership test”) and
- You have lived in and used the home for 2 out of the last 5 years (“use test”)
These two periods of time do not have to be the same, or overlap with one another, but both must have occurred during the 5 years prior to the sale. For example, you may have rented the home for 2 years. Then, six months later, you bought the house, but you did not live in it thereafter. Instead, you rented it to someone else for 2 years. Because you lived in the home for 2 years, and owned the home for 2 years, all within the last 4.5 years, you meet both tests.
There are other factors to consider as well. You are generally ineligible for the exclusion of tax liability if you excluded the gain from the sale of another residence during the two-year period prior to the sale of your current primary residence. Also, if you separated or were divorced prior to the sale of a home, you may be allowed to treat the home as your residence if you are the sole or joint owner and your spouse or former spouse is allowed to live in the home under a decree of divorce or separate maintenance and lives in the home as his or her primary residence. In addition, if a spouse or former spouse transfers a home to you, you may be allowed to count any time your spouse owned the home as time that you owned it, but you have to meet the residence requirement on your own.
As you can see, the laws governing the home sale tax exclusion can be rather complicated. To discuss your particular situation, contact the Law Offices of Clifford M. Cohen at (202) 895-2799 and schedule a personal meeting.