Gains Tax Exemption on Your Primary Residence
be sure to talk with your tax professional and legal advisor
regarding real estate related taxes involved in selling your
Your home is probably the most valuable asset you own. It
is also probably
your best tax shelter. Selling a home can be a major event
in the lives of its owner.
to the Taxpayer Relief Act of 1997, selling a home does not
have to be a major tax event.
on the Sale of a Main Home.
to the Taxpayer Relief Act enacted in 1997, married couples
receive up to $500,000 in capital gains tax exclusion for
the sale of a principal residence where the owner has resided
in the property for two of the last five years. Single owners
enjoy similar $250,000 exclusion. The two years
in question do not need to be consecutive years. In the five
years prior to the sale of the house, you need to have lived
in the house for at least 24 months in the 5-year period.
Any profits in excess of the exclusion caps ($500,000 for
married couples; $250,000 for singles) will be taxed at the
new lower capital gains tax rate. Best of all, this principal
residence exclusion can be reused each time you sell your
main home. Keep in mind, the home must have been your principal
residence. Generally, you can claim the exclusion only once
every two years. (Some exceptions do apply)
Gain In Excess of the Exclusion Amount on the Sale of Your
in excess of the allowable exclusion is reported on Schedule
D as a capital gain. If you owned your home for one year or
less, the gain is reported as a short-term capital gain. If
you owned your home for more than one year, the gain is reported
as a long term capital gain.
to the 2 out of 5 Year Rule.
lived in your home less than 24 months, you still may be able
to exclude a portion of the gain. Exceptions are allowed if
you sold your house because a required job change, because
of health concerns, or for some other unforeseen circumstances
that you couldnt reasonably have anticipated before
buying and occupying your main home.
CPA can help you here.
Gain from the Sale of Your Home
the gain from the sale of your home, use the following procedure:
the selling price of the home minus the expenses from the
sale of the
this number, then subtract the basis of the home
which is the price that
you originally paid for the home plus any improvements.
net selling price minus the basis equals the gain on your
Its a bit more complicated than this, so dont
try it at home! This final figure is the
realized gain from the sale of the home.
on the Sale of a Residence
still cannot deduct losses on the sale of their residence.
Sale of More than One Home in Two Years
exclude a gain on the sale of your home if, during the two-year
on the date of the sale, you sold another home at a gain and
excluded all or part of that
gain. If you cant exclude the gain, you must include
it in your income.
For more information, please refer to the link for the Internal
Publication 523 http://www.irs.gov/publications/p523/index.html
Sources: Internal Revenue Service Publication 523; IRS Tax
Tip 2006-54; California
Society of CPAs; Forbes.com Financial Planning Taxes and Selling
compiled by Scott Reeves 01/17/06