| Personal Residence / Exclusion of gain on sale or exchange of principal residence |  |
|||
|
Selling your home and moving into a
smaller one or a condo is seldom an easy decision, but at least part of
the decision-making process is a little easier in light of an exclusion
that eliminates most people's federal tax liability on gain from the
sale or exchange of their homes. Under these rules, up to $250,000 of
the gain from the sale of single person's principal residence is
tax-free. For certain married couples filing a joint return, the maximum
amount of tax-free gain doubles to $500,000. Like most tax breaks, however, the
exclusion has a detailed set of rules for qualification. Besides the
$250,000/$500,000 dollar limitation, 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.
However, a reduced exclusion is available if the sale occurred because
of a change in place of employment, health, or other unforeseen
circumstances (that IRS may specify in future regulations). Where the
exclusion wasn't used on another home sale within the previous two
years, the amount of the reduced exclusion equals a fraction of the
$250,000/$500,000 dollar limitation. The fraction is based on the
portion of the two-year period in which the seller satisfies the
ownership and use requirements. These rules can get quite complicated if you marry someone who has recently used the exclusion provision, if the residence was part of a divorce settlement, if you inherited the residence from your spouse, if you sell a remainder interest in your home, or if you have taken depreciation deductions on the residence. |
Home
Tax topics |
|||