Generally, when a home owner sells their main residence IRS allows an exclusion of gain from the sale. To qualify for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly) you must meet the Eligibility Test.
Eligibility Test.
Eligibility Step 1—Automatic Disqualification
Your home sale isn’t eligible for the exclusion if ANY of the following are true.
- You acquired the property through a like-kind exchange (1031 exchange), during the past 5 years. See Pub. 544, Sales and Other Dispositions of Assets.
- You are subject to expatriate tax. For more information about expatriate tax, see chapter 4 of Pub. 519, U.S. Tax Guide for Aliens.
Eligibility Step 2—Ownership
If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.
Eligibility Step 3—Residence
If you owned the home and used it as your residence for at least 24 months (2 years) of the previous 5 years, you meet the residence requirement. For details how to properly calculate the residence period refer to Pub. 523.
Special rules apply if you were ever away from home, or if you become physically or mentally unable to care for yourself and had to live in a care facility. Refer to Publication 523 .
Eligibility Step 4—Look-Back
If you didn’t sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, you didn’t take claim an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period.
Eligibility Step 5—Exceptions to the Eligibility Test
There are some exceptions to the Eligibility Test. So, in a case you don’t meet the eligibility test don’t stop there. Do your due diligence and it could save you thousands of Dollars in taxes.
If any of the following situations are true for you, ask to see if they may affect your qualification.
- A separation or divorce occurred during the ownership of the home. See Separated or divorced taxpayers .
- The death of a spouse occurred during the ownership of the home. See Widowed taxpayers .
- The sale involved vacant land. See Vacant land next to home .
- You owned a remainder interest, meaning the right to own a home in the future, and you sold that right. See Remainder interest .
- Your previous home was destroyed or condemned. See Home destroyed or condemned—considerations for benefits .
- You were a service member during the ownership of the home. See Service, Intelligence, and Peace Corps personnel .
- You acquired or are relinquishing the home in a like-kind exchange. See Like-Kind/1031 exchange .
If you don’t meet the Eligibility Test, you may still qualify for a partial exclusion of gain (meaning an exclusion of gain less than the full amount). You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event.
So don’t skip on talking to your tax accountant to see if the facts and circumstances surrounding the sale of your home will give you an exception to the eligibility test, or a partial exclusion of the gain from the sale of your home. Contact our professionals if you have any questions about your specific circumstances. We are here to help you take advantage of all advantageous tax law.
The materials posted in this article are for informational purposes only and should not be regarded as accounting or tax advice provided by YR Tax Compliance LLC. These materials have been prepared by professionals, however they should not replace professional services, and the user should seek advice before acting on any information presented. Every situation is uniquely different, and could make a world of difference on implementation of specific regulations. YR TAX Compliance LLC assumes no obligation to provide notification of changes of tax laws, regulations or other factors that could affect the information posted.