Selling Your Home

In many instances, individuals who make a profit on the sale of a home may not have to pay a single dime of additional income tax to the IRS if certain criteria are met. 

Generally, a profit is made if the selling price of a home is greater than the price that was paid to purchase the home.  That profit, considered a capital gain, is usually subject to income tax.  However, under certain circumstances, the law allows a taxpayer to exclude all or part of that gain from his or her income – that is, tax may not have to be paid on the profit.

Individuals may be able to exclude up to $250,000 of capital gain on the sale of their home, and married taxpayers filing joint returns may be able to exclude up to $500,000.  The exclusion may be claimed each time that the main home is sold, but generally not more than once every two years.

To qualify, both the ownership and use tests must be met.

• Ownership Test: During the five-year period ending on the date of the sale, the taxpayer must have owned the home for at least two years.

• Use Test: During the five-year period ending on the date of the sale, the taxpayer must have lived in the home as his or her main home for at least two years.

If a taxpayer files a joint return with his or her spouse and both meet the use test, the taxpayer normally will be able to claim the exclusion for married couples even if only one of them meets the ownership test.

If these tests are not met, a reduced amount of the gain realized on the sale of a home may still be excluded.  But the home must have been sold for other specific reasons, such as serious health issues, a change in the place of employment, or certain unforeseen circumstances (such as a divorce or legal separation), natural or man-made disasters resulting in a casualty to the home, or an involuntary conversion of the home.

For sales after 2007, the maximum exclusion on the sale of a main home by an unmarried surviving spouse is $500,000 if the sale occurs no later than two years after the date of the other spouse's death.  However, this rule applies only if the requirements for joint filers relating to ownership and use were met immediately before the date of death, and during the two-year period ending on the date of death, there was no sale or exchange of a main home by either spouse which qualified for the exclusion.

For individuals on qualified official extended duty in the U.S. Armed Services, the Foreign Service, or the intelligence community, the five-year test period may be suspended for up to ten years.  It is considered qualified extended duty when, for more than 90 days or for an indefinite period, that individual is:

• At a duty station that is at least 50 miles from his or her main home, or

• Residing under government orders in government housing.

Intelligence community members must serve on extended duty at a duty station that is located outside the United States.

If you have questions related to your specific circumstances, please give us a call.