One of the most significant tax advantages to owning a home comes at the back end of ownership, when you decide to sell it for a profit. A homeowner can exclude up to $250,000 of such profit from their federal capital gains tax. For married couples filing a joint tax return, the exclusion jumps to $500,000. This big tax break, however, does come with some basic requirements. It applies to the sale of only a “principal residence,” not a vacation home or investment property. With some limited exceptions for poor health, job changes and unforeseen circumstances, the taxpayer must have owned and used the home as a primary residence for at least two of the five years (the two years need to be an “uninterrupted timespan”) preceding the sale of the home.
If the history of the home includes some business use, the owner cannot exclude that part of the gain that is equal to the depreciation claim while the house was used as a rental property. This scenario could arise when an owner rents out the house for a period of time but then moves back in, sells it, and otherwise qualifies for the exclusion related to that sale.
There is another two-year rule that comes into play after a taxpayer claims the home sale exclusion. There is no limit to the number of times that the exclusion can be claimed for multiple sales, but, as a rule, once the exclusion is claimed, the taxpayer must wait two years before claiming another such exclusion.
For a married couple to quality for the exclusion, it is sufficient if either spouse meets the ownership requirement. However, both spouses must meet the use requirement. Neither spouse is rendered ineligible for the exclusion because he or she had already excluded the gain on a different primary residence during the two years preceding the date of the current sale.
So, as you consider the sale of your home this spring, please remember the “basics” with respect to how those gains you may realize from the profit on the sale of your home will be taxed come tax time next year.