Even with the last significant change going back to 1997, the rules for when a personal residence can be sold tax free are often misunderstood. Selling a home isn’t a daily occurance for most people and it’s not uncommon for the prior rules to have been in place the last time a homeowner did so.
The old rule required a homeowner to continually purchase a more expensive home, deferring the gain until a later date, and provided a one time exclusion for up to $125,000 of gain after age 55. This went out durring the Clinton adminstration. Since the change, a primary residence sale can exclude up to $250,000 of gain for a single individual ($500,000 if married filing joint). There is no age requirement and no limit to the number of times it can be done.
In order to qualify for this exclusion the home must meet the following criteria:
- The property must be a primary residence
- The homeowner must have lived in, and owned, the property for 2 of the last 5 years (allthough these need not be concurrent)
- The exclusion is only allowed once every 2 years.
Even when the property is not held for the requisite 2 years, some gain can be excluded if the property is sold due to unforseen circumstances. This has been broadly interpreted to include everything from job relocation to a homeowner’s child being bullied at school.
The gain exclusion does not apply to depreciation recapture (which is likely to exist if there was ever a home office or the property was rented out). Also, due to perceived abuses, in 2008 the law was modified to reduce the exclusion amount when a homeowner moves into a former rental property less than 5 years before the sale. Likewise, unless converted to use as a primary residence, vacation homes do not qualify.
If you would like to discuss discuss the tax ramifications of selling your home please feel free to contact us for a consultation.
Written by Damien Falato, CPA, MST, CGMA, Tax Director