For some, like my sister, enjoy selling her home every few years. The gain on selling primary residence, when conditions are met, is up to $250,000 for individuals and $500,000 for couples filing join returns. For people who are not married, but purchase a home together, each could exclude up to $250,000 gain.
What are the conditions for excluding the gains? Mainly the Ownership and Occupancy tests. If you fulfill the two-year requirement, the gains won’t be taxed on your income tax returns. If it is done properly, you could actually sell your home every two years without having to pay income taxes on the capital gain in your income tax returns. But you have to pay real estate realtor/agent commissions, closing estate attorney fees and transfer taxes just to name a few. According to one of the Realtors (Ms. Maureen T.), it usually takes about 3-4 years to recover these expenses; hence, it is prudent to stay at least that long to recoup the expenses. Also, moving expenses and the energy involved. Picking a professional and devoted real estate realtor is key to sell a house at fair market value effectively , in my humble opinion; it is a (how to put it politely) “mission impossible”… (call me if you want to insider scoop as I was dare to put my review on Zillow and immediately was threatened by this “big shot” “realtor”).
So long as you own and live in your home for a total of TWO years of the past five years at the time of the sale, you are qualified for the exclusion. You could live in it on and off to count for the “two years” period. The best part is, if I may, that you do not need to own and live in your home during the same two years. For example, you could own your home, rent it out up to three years, and still meet the conditions.
If you can’t meet the Ownership and Occupancy tests, you might still be able to exclude part of the capital gains proportionally.
Exception to Occupancy test: relocation due to employment changes, or health issue (by doctor’s order). Then you won’t have to fulfill living at your home for two years as required.
Further, your home doesn’t have to be a house. It could be a townhome, condominium, co-op, or a mobil home.
Nonetheless, your home has to be your primary residence which is where you (and your spouse if filing jointly) live. If you live in more than one place, the property where you spend the majority of your time qualifies as a primary residence.
However, if you receive form 1099S – Proceeds from Real Estate Transactions; then unfortunately, you are required to report the sale of your house on your form 1040 individual income tax returns even though you need not to recognize any capital gain.
Occasionally, if you sold your house by installments to defer all or part of selling prices to later years; in other words, you defer some of the gains by installment method, you are still entitled to the capital gain exclusion.
Lastly for married couples, you also have to:
- Stay married and file joint returns for that year
- Either you or your spouse meet the ownership test
- Both of you have to meet the occupancy test
- During the two-year period ending on the date of the sale, neither of you had excluded gain from selling of another home
IF your spouse dies, and you sell your home after his/her death, you may still qualify for the $500,000 capital gain exclusion if the sale within two years after the date of death, and other requirements listed above were fulfilled immediately before the date of death.
After May 6, 1997, all depreciation taken on home office will be taxed at 25% capital gain when sells the primary home.
As I say often to my clients, do what you have to do while taking taxes into consideration, as one of the variables in making the decision. I am happy to discuss further….
To the best of my knowledge and effort, I wrote this article in general terms as each person’s situation varies. Tax laws do change from time to time. No guarantee is made or claimed through this article. Personalized advice is recommended to consult’s one’s own advisor or contact the author.