When You Sell Your Home Impacts Your Taxes

Your Guide to State, Local, Federal, Estate + International Taxation

In the world of taxes, there are times when you do something one way and everything is fine, but do it another way and the results are dramatically different, and not in a good way. Selling your home can be one of those things. Depending on the circumstances of when you sell your home (among other factors), you may be able to exclude all or a portion of any gain realized.

How to qualify

In order to qualify for the exclusion, there are two basic tests that you must meet: the ownership test and the use test. In short, you have to own and use the property as your principal residence for two of the last five years. While it is probably most common that both tests are met in the same time period, it doesn’t have to be that way. You could move into a house as a renter for a year, buy the house and live in it for another year, then use it as a second home for another year and then sell it. In this scenario, you used the property as a principal residence for two years, one as a renter and one as a homeowner. You owned the house for two years, one while you were living in it and one when you used it as a second home. This scenario is probably fairly uncommon, but you would meet both the use and ownership test.

Exclusion amount

The maximum exclusion amount is $500,000 for married filing jointly taxpayers or $250,000 for all other filing statuses. In order to claim the full $500,000 both spouses must meet the use test while only one needs to meet the ownership test.

Some important details that may affect how much you can exclude

First of all, you can only use the exclusion once every two years. In the case of married filing joint, if one spouse has used the exclusion within the last two years, the maximum amount that can be excluded is $250,000.

The exclusion may be reduced by any nonqualified use of the property. Nonqualified use essentially means any use other than use as a principal residence (so think along the lines of rental or second home). However nonqualified use does not include:

  • Any time after the last date the property was used as a principal residence
  • Any period two years or less for temporary absences due to changes in employment, health conditions or other unforeseen circumstances
  • Time spent serving in the military (not to exceed 10 years)

If you move prior to meeting the two years, you still may be able to exclude a portion of the gain. The exceptions for this are a change in employment, health conditions or unforeseen circumstances. If this is the case, you can exclude a proportional amount of the $250,000/$500,000.For example, if you only lived at the residence for 18 months, you could exclude $187,500/$375,000 (18/24 X 250,000).

In conclusion, this is definitely an area where it’s worth knowing the facts beforehand. It could be the difference between picking up $500,000 of income or not. When in doubt, ask!

By Richard Christensen