Tax Breaks for Selling Your Home: Read the Fine Print
If you sell your home, you may exclude up to $250,000 of your capital gain from tax -- or up to $500,000 for married couples.
The 1997 Taxpayer Relief Act contained a big break for homeowners. If you sell your home, you may exclude up to $250,000 of your capital gain from tax. For married couples filing jointly, the exclusion is $500,000. Also, unmarried people who jointly own a home and separately meet the tests described below can each exclude up to $250,000.
The law applies to sales after May 6, 1997. To claim the whole exclusion, you must have owned and lived in your residence an aggregate of at least two of five years before the sale (this rule is called the "ownership" and "use" test). You can claim the exclusion once every two years.
If You Don't Meet the Use Test
Even if you haven't lived in your home a total of two years out of the last five, you are still eligible for a partial exclusion of capital gains if you sold because of a change in your employment or health, or other unforeseen circumstances. You get a portion of the exclusion, based on the portion of the two-year period you lived there. To calculate it, take the number of months you lived there before the sale and divide it by 24.
For example, if an unmarried taxpayer lives in her home for 12 months, and then sells it for a $100,000 profit, the entire amount would be excluded. Because she lived in the house half of the two-year period, she could claim half of the exclusion, or $125,000. (12/24 x $250,000 = $125,000.) That's enough to exclude her entire $100,000 gain.
Nursing Home Stays
For people living in a nursing home, the ownership and use test is lowered to one out of five years before entering the facility. And time spent in the nursing home still counts toward ownership time and use of the residence. For example, if you lived in a house for a year, and then spent the next five in a nursing home before selling the home, the full $250,000 exclusion would be available.
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Copyright 2007 Nolo
