Home Sale Exclusion From Capital Gains Tax
Individual taxpayers filing as single can benefit from a home sales exclusion that allows them to exclude up to $250,000 in profits from capital gains tax when selling their primary personal residence. For married taxpayers filing jointly, the exclusion limit is higher, allowing them to exclude up to $500,000 in gains.
Key Takeaways
- You don’t have to pay capital gains tax on the entire amount of the profit you earn from the sale of your home.
- Single filers can exclude up to $250,000 of capital gains; married taxpayers filing jointly can exclude up to $500,000.
- Gains in excess of the exclusion amounts are taxed at capital gains tax rates.
- To qualify, taxpayers must meet ownership, residency, and other requirements.
- Some taxpayers may not qualify for the entire amount of the exclusion.
How Does the Home Sale Exclusion Work?
The capital gain or loss in real estate is determined by calculating the difference between the sales price and the property’s basis, which includes the purchase price and certain qualifying costs. For example, if you bought a home for $150,000 and sell it for $350,000, your gain would be $200,000. This gain is tax-free if you’re single, as it falls within the $250,000 exclusion limit.
However, if the property is sold for $450,000, the gain would be $300,000 ($450,000 – $150,000). In this case, you would need to report a capital gain of $50,000 on your tax return because it exceeds the $250,000 exclusion limit.
The 2-out-of-5-Year Rule
Your property must be your primary residence, not an investment property, to qualify for the home sale exclusion. The home must have been owned and used for a minimum of two out of the last five years immediately preceding the date of sale. The two years don’t have to be consecutive, however, and you don’t have to live there on the date of the sale.1 This is also referred to as the “residence test.”
Note
Your two years of residency and the two years of ownership don’t have to be concurrent. You can live in the home for a year, rent it out for three years, then move back in for 12 months. The IRS figures that if you spent this much time under that roof, the home qualifies as your principal residence.
You can use this 2-out-of-5-year rule to exclude your profits each time you sell your main home, but this means that you can claim the exclusion only once every two years because you must spend at least that much time in a residence. You can’t have excluded the gain on another home in the last two-year period.4
Exceptions to the 2-out-of-5-Year Rule
You might be able to exclude at least a portion of your gain if you lived in your home less than 24 months but you qualify for one of a handful of special circumstances such as a change in workplace, a health-related move, or an unforeseeable event.
Justin Brickman, Best Realtor
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