Selling a house can be expensive, especially when you consider that any profit you make is considered a capital gain and is therefore taxable. The upside is that a significant portion of that profit could be excluded from taxation if you meet certain criteria.
If over the past five years you have owned a home and lived there as your primary place of residence for at least two years, you are likely eligible to claim a tax exclusion of up to $250,000. If you’re married and file a joint tax return with your spouse, the exclusion amount goes up to $500,000. This means that you won’t be taxed on any profit up to that figure, which is great news!
These two main qualifications are known as the ownership and residency requirements (or tests) for this particular tax exclusion. The ownership part is fairly straightforward, but it’s worth noting that either you, your spouse, or the two of you together can be the owner(s) of the home.
The residency requirement also has some flexibility. You must have lived in the home as your primary residence for at least two years within the past five years, but that can mean either 24 consecutive months or 730 days total. If you were away from home for a temporary absence of one year or less for school, work, or military service, or if you left due to illness or even travel, that won’t count against you as long as the home remained the primary residence to which you planned to return. To claim the $500,000 credit for spouses filing taxes jointly, however, both parties must meet the use test.
The main caveat to this capital gains tax exclusion is that you can only use it every two years. If you’re filing taxes jointly with your spouse, neither of you can have excluded the gain from the sale of a home within a two-year time frame.
There are always several tax considerations to weigh when you’re selling or buying a home, but sometimes the tax code works in your favor! If you are considering selling your house, talk to a tax expert to find out if you qualify for a capital gains exclusion on the sale. You might be in for some positive news!