Home Sellers: Tax Benefit of Selling Your Home
I am asked regularly about the tax consequences involved in selling a home. The following will give you some information on this subject
Your home may not always be your "castle", but if it is your principal residence, there is one very significant tax benefit when you decide to sell.
The Taxpayer Relief Act of 1997, signed by President Clinton on August 5, 1997, terminated both the roll-over and the once-in-a-lifetime exemption, which were the existing tax benefits at that time. In its place, the law substituted a more beneficial approach for American homeowners.
When you sell your home, married couples can exclude from their taxable income up to $500,000 of gain. Individuals filing separate returns can exclude up to $250,000. Unlike a deduction, which allows you to take a percentage off your gross income (based on the tax rate bracket in which you fall) the exclusion means that the profit you make up to the statutory ceiling is not even included in your income for tax purposes.
There are two important conditions:
- You must have owned and used the home as your principal residence for two out of five years before the sale. If you are married, although both husband and wife must meet the "use" test, only one of you must meet the "occupancy" test. Marital status is determined on the date the house is sold. In the event of a divorce where one spouse is given ownership pursuant to a divorce decree or separation agreement, the use requirements will include any time that the former spouse actually owned the property before the transfer to the other spouse.
- The exclusion is generally applicable once every two years. However, if you are unable to meet the two year ownership and use requirements because of a change in employment, health reasons or unforseen circumstances, then your exclusion may be prorated.
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