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Learn how you might still qualify for this incredibly valuable deduction even if you don't meet all the requirements.When you sell your home, you qualify for a huge tax break. If you meet the requirements for the home sale tax exclusion, you don't have to pay any income tax on up to $250,000 of the gain from the sale of your principal home if you're single, or up to $500,000 if you're married and file a joint return. To qualify for the $250,000/$500,000 home sale exclusion, you must own and occupy the home as your principal residence for at least two years before you sell it. What if you have to sell your home even though you don't comply with all the requirements for the exclusion? This would occur, for example, if you sell before you have lived in the home for two years, or if you have already used the exclusion for another home less than two years prior to this sale. If this happens, you may still qualify for a partial exclusion if you have a good excuse for selling the property. Good excuses include:
A change in the place of employment for you, your spouse, any co-owner of the property, or any other person who uses your home as his or her principal residence is always a valid excuse if the location of the new job is at least 50 miles further away from your old home. This is the same distance rule that applies for the moving expense deduction. Moves of less than 50 miles could also qualify depending on the circumstances. Health problems are a valid excuse if a doctor recommends that you move for health reasons—for example, you have asthma and your doctor tells you that living in Arizona would be better for you than Maine. The health problems can belong to you, your spouse, any co-owner of the property, any other person who uses your home as his or her principal residence, or a close family member of any person in the prior categories—for example, a child or parent. Thus, for example, you can move if you need to be closer to an ill parent. If you want to use the health exception, be sure to get a letter from your doctor stating that the move is for health reasons and what they are. Keep the letter with your tax files. If you have a valid excuse for not complying with all the requirements for the exclusion, you'll get a partial exclusion—not the whole $250,000/$500,000. The amount is ordinarily limited to the percentage of the two years that you fulfilled the requirements. For example, if you own and occupy a home for one year (50% of two years) and have not excluded gain on another home in that time, you may exclude 50% of the regular maximum amount—up to $125,000 of gain for a single taxpayer and $250,000 for married couples. The percentage may be figured by using days or months. Talk to a Tax AttorneyNeed a lawyer? Start here. How it Works
Legal Information & Books from Nolo Popular Products from Nolo Though most home-sale profit is now tax-free, there are still steps you can take to maximize the tax benefits of selling your home. Learn how to figure your gain, factoring in your cost basis, home improvements and more. Key Takeaways • If you owned and lived in the home for a total of two of the
five years before the sale, then up to $250,000 of profit is tax-free (or up to $500,000 if you are married and file a joint return). • If your profit exceeds the $250,000 or $500,000 limit, the excess is typically reported as a
capital gain on Schedule D. • If you acquire ownership of a home as part of a divorce settlement, you can count the time the place was owned by your former spouse as time you owned the home for purposes of passing the
two-out-of-five-years ownership test but not the residency test. • If either spouse dies and the surviving spouse has not remarried prior to the date the home is sold, the surviving spouse can count the period the deceased spouse owned and used the property toward the ownership-and-use test. Profit on home sale usually tax-freeMany home sellers don’t even have to report the transaction to the IRS. But if you’re one of the exceptions, knowing the rules about excluding the profit from your income can help you hold down your tax bill. Do I have to pay taxes on the profit I made selling my home?It depends on how long you owned and lived in the home before the sale and how much profit you made.
The law lets you "exclude" this profit from your taxable income. (If you sold for a loss, though, you can't take a deduction for that loss.)
How do I qualify for this tax break?There are three tests you must meet in order to treat the gain from the sale of your main home as tax-free:
If you're married and want to use the $500,000 exclusion:
Special circumstancesEven if you don't meet all of these requirements, there are special rules that may allow you to claim either the full exclusion or a partial exclusion:
TurboTax Tip: If you sell your house because of a change of employment, change of health, or other unforeseen circumstances, such as a divorce or multiple births from a single pregnancy, you may be able to treat part of
your profit as tax-free even if you don't pass the two-out-of-five-years tests. Members of the uniformed services, foreign service and intelligence agenciesYou can choose to have the five-year-test period for ownership and use suspended for up to ten years during any period you or your spouse serve on "qualified official extended duty" as a member of the uniformed services, Foreign Service or the federal intelligence agencies. You are on qualified extended duty when, for more than 90 days or for an indefinite period, you are:
This means that you may be able to meet the two-year use test even if, because of your service, you did not actually live in your home for at least the required two years during the five years prior to the sale. How can I qualify for a reduced exclusion?In certain cases, you can treat part of your profit as tax-free even if you don't pass the two-out-of-five-years tests. A reduced exclusion is available if you sell your house before passing those tests because of a,
So, if you need to move to a bigger place to find room for the triplets, the law won't hold it against you. Note: A reduced exclusion does NOT mean you can exclude only a portion of your profit. It means you get less than the full $250,000/$500,000 exclusion. For example, if a married couple owned and lived in their home for one year before selling it, they could exclude up to $250,000 of profit (one-half of the $500,000 because they owned and lived in the home for only one-half of the required two years). Deciding whether to take the exclusionWould it ever make sense to turn down the government's generosity and not claim the exclusion? Although it's very unlikely, paying tax on a home sale can make sense if it preserves the exclusion to protect more profit on another home that you plan to sell within two years. Remember, although you can use the exclusion any number of times during your life, you can't use it more than once every two years. Do I have to report the home sale on my return?You generally need to report the sale of your home on your tax return if you received a Form 1099-S or if you do not meet the requirements for excluding the gain on the sale of your home. See: "Do I have to pay taxes on the profit I made selling my home?" above. Form 1099-S: Proceeds from Real Estate Transactions is generally issued by the real estate closing agent—a title company, real estate broker or mortgage company. To avoid getting this form (and having a copy sent to the IRS), you must give the agent some assurances at any time before February 15 of the year after the sale that all the profit on the sale is tax-free. To do so, you must assure the agent that:
Essentially, the IRS does not require the real estate agent who closes the deal to use Form 1099-S to report a home sale amounting to $250,000 or less ($500,000 or less for married couples filing jointly).
If you did receive a Form 1099-S, that means the IRS got a copy as well. That doesn't necessarily mean you owe tax on the sale, though.
Figuring gain on the sale of a homeYou have a gain if you sell your house for more than it cost. Ah, but how do you calculate the real cost? For tax purposes, you need to pinpoint your adjusted basis to figure out whether or not you have gained or lost in the sale.
On the other hand, you need to subtract:
So, let's say you bought a house for $50,000 in 1993, sold it for $75,000 in 1996, and postponed the tax on the $25,000 profit by purchasing a new home for $110,000. The basis of the new home would be $85,000.
What is the original cost of my home?The original cost of your home, for most people, is the amount you paid for it. If you purchased your home from someone else, the price you paid is your purchase price (plus certain settlement and closing costs). Your closing statement should list all of these costs. Don't include:
If you built your home, your original cost is the cost of the land, plus, the amount it cost you to construct your home, including,
If you inherited your home, your basis in the home will be the number you use for "original cost."
What is the adjusted basis of my home?The adjusted basis is simply the cost of your home adjusted for tax purposes by improvements you've made or deductions you've taken. For example, if the original cost of the home was $100,000 and you added a $5,000 patio, your adjusted basis becomes $105,000. If you then took an $8,000 casualty loss deduction, your adjusted basis becomes $97,000.
Here's how you calculate the adjusted basis on a home: Start with the purchase price of your home (as described above).
To that starting basis add:
From that upwardly adjusted basis, subtract:
The result of all these calculations is the adjusted basis that you will subtract from the selling price to determine your gain or loss. This adjusted basis is what's considered to be your cost of the home for tax purposes. Basis when you inherit a homeIf you inherited your home from your spouse in any year except 2010 and you lived in a community property state—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin—your basis will generally be the fair market value of the home at the time of your spouse's death. If you lived somewhere other than a community property state, your basis for the inherited portion of the home in any year except 2010 will be the fair market value at your spouse's death multiplied by the percentage of the home your spouse owned.
If you inherited your home from someone other than your spouse in any year except 2010, your basis will generally be the fair market value of the home at the time the previous owner died.
Divorce and tax basisIf you received your home from your former spouse as part of a divorce after July 18, 1984, your tax basis generally will be the same as your basis as a couple at the time of the divorce. So,
If you divorced before July 19, 1984, your basis will generally be the fair market value at the time you received it. Postponed gains under the old "rollover" rulesIn the past, you may have put off paying the tax on a gain from the sale of a home, usually because you used the proceeds from the sale to buy another home. Under the old rules, this was referred to as "rolling over" gain from one home to the next.
You can no longer postpone gain on the sale of your personal residence. For sales after May 7, 1997:
To see how a rollover of gain prior to the change in the law can affect your profit, consider this example: Let's say you bought a house for $50,000 in 1993, sold it for $75,000 in 1996, and postponed the tax on the $25,000 profit by purchasing a new home for $110,000. Your basis on your new home would be $85,000.
Converting a second home to a primary residenceAlthough the rule that allows homeowners to take up to $500,000 of profit tax-free applies only to the sale of your principal residence, it has been possible to extend the tax break to a second home by converting it to your principal residence before you sell. Once you live in that home for two years, you have been able to exclude up to $500,000 of profit again. That way, savvy taxpayers can claim the exclusion on multiple homes. Note: Congress has clamped down on this break for taxpayers who convert a second home into a principal residence after 2008.
So, if you are married filing jointly and have owned a vacation home for 18 years and make it your main residence in 2022 for two years before selling it, 50% of the gain is taxed (ten years, 2011-2020, of non-qualified second home use divided by 20 years of total ownership). The rest would qualify for the exclusion of up to $500,000. For more informationFor information on figuring out whether you have a gain or loss on the sale of your home, see IRS Tax Topic 703: Basis of Assets. For general information on the sale of your home, see IRS Publication 523: Selling Your Home, and Tax Topic 701: Sale of Your Home. TurboTax will search over 350 deductions to get your maximum refund, guaranteed. If you’re a homeowner, TurboTax Deluxe gives you step-by-step guidance to help turn your biggest investment into your biggest tax break. |