Updated: Jan 6, 2021
The Real Estate market is hot! It's a sellers' market! This means that most people are selling their home for more than what they purchased it for, creating a gain. If you are considering selling your home, you'll want to find out what the tax consequences are. The sale may create a tax bill. Find out if you qualify for the Home Sale Gain Exclusion and avoid paying unnecessary tax. A married couple filing joint may be able to exclude $500,000 ($250,000 if single) of gain from the sale of their home. If the eligibility test is not met, you may still qualify for the Partial Exclusion of Gain.
Requirements - Full Exclusion In order to take advantage of the full exclusion, three requirements must be met. If the requirements are not met, a partial exclusion may be available. 1. Two-Year Look-Back Period The exclusion can be taken only once during a 2-year period. 2. Principal Residence A principal residence is one that you and your spouse lived in for at least 24 months (2 years) out of the previous 5 years, during which the home was your primary residence. The 24 months are not necessarily consecutive. Both spouses must meet the residency rule in order to qualify for the full exclusion. A partial exclusion is available if one of the spouses does not meet the requirement. For those who are physically or mentally unable to care for themselves, the residency requirement is 12 months. 3. Ownership The gain exclusion applies only to a sale of your principal residence which you owned for at least 2 of the previous 5 years. For a married couple, filing joint, only one of the spouses needs to be an owner. Partial Exclusion If you did not meet the requirements, you may qualify for a partial exclusion of gain. To qualify for the partial exclusion, the reason for the sale of your home must be because of any of the following:
change in workplace location - the distance from the home to the new job compared to the distance from the home to the old job must be 50 miles farther.
health issue - for example, if you moved in order to provide health treatment for yourself or a family member.
an unforeseeable event - such as death, divorce, birth of twins, unemployment benefit eligibility, and other unforeseeable events.
Rental House You may have converted your primary residence into a rental and then sold it. The depreciation would be "recaptured," meaning - the depreciation that you took as a deduction, up to the amount of gain, will be taxed at the income tax rate. The remainder of the gain may be excluded, that is, if the requirements for the home gain exclusion are met. Like-Kind Exchange If a home is acquired through a like-kind-exchange, it does not qualify for the home gain exclusion. Other Situations Contact me if you have a special situation: if you are selling a vacant lot next to your home; you used and deducted a home-office for your business; your home was destroyed or condemned; you received your home as a gift; or any other special situation. Vera V. Likhonin, EA Stewardship Tax & Accounting, LLC