The real estate market has been buzzing with many homeowners realizing substantial gains from the sale of their home. But do those great sales proceeds come with tax consequences? Read on to learn about gain on your primary residence and if you could qualify for the home gain exclusion, one of the largest tax breaks in real estate.
Home Gain Exclusion
The $250,000 ($500,000, if married) home sale gain exclusion break is one of the great tax-saving opportunities.
Unmarried homeowners can potentially exclude gains up to $250,000, and married homeowners can potentially exclude up to $500,000. You as the seller need not complete any special tax form to take advantage.
To take full advantage of the principal residence gain exclusion break, you must pass two tests: the ownership test and the use test.
- To pass the ownership test, you must have owned the home for at least two years out of the five-year period ending on the sale date.
- To pass the use test, you must have used the home as your principal residence for at least two years out of the five-year period ending on the sale date.
Key point. These two tests are completely independent. In other words, periods of ownership and use need not overlap.
If you’re married and you and your spouse file your tax returns separately, you can potentially qualify for two separate $250,000 exclusions.
If you’re married and file jointly, you qualify for the $500,000 joint-filer exclusion if:
- either you or your spouse pass the ownership test for the property and
- both you and your spouse pass the use test.
Premature Sale Due to Employment Change
You’re eligible for the prorated gain exclusion privilege whenever a premature home sale is primarily due to a change in place of employment for any qualified individual.
“Qualified individual” means:
- the taxpayer (that would be you),
- the taxpayer’s spouse,
- any co-owner of the home, or
- any person whose principal residence is within the taxpayer’s household.
In addition, almost any close relative of a person listed above also counts as a qualified individual. And any descendent of the taxpayer’s grandparent (such as a first cousin) also counts as a qualified individual.
A premature sale is automatically considered to be primarily due to a change in place of employment if any qualified individual passes the following distance test: the distance between the new place of employment/self-employment and the former residence (the property that is being sold) is at least 50 miles more than the distance between the former place of employment/self-employment and the former residence.
Premature Sale Due to Health Reasons
You are also eligible for the prorated gain exclusion privilege whenever a premature sale is primarily due to health reasons. You pass this test if your move is to
- obtain, provide, or facilitate the diagnosis, cure, mitigation, or treatment of disease, illness, or injury of a qualified individual, or
- obtain or provide medical or personal care for a qualified individual who suffers from a disease, an illness, or an injury.
A premature sale is automatically considered to be primarily for health reasons whenever a doctor recommends a change of residence for reasons of a qualified individual’s health (meaning to obtain, provide, or facilitate care, as explained above). If you fail the automatic qualification, your facts and circumstances must indicate that the premature sale was primarily for reasons of a qualified individual’s health.
You cannot claim a prorated gain exclusion for a premature sale that is merely beneficial to the general health or well-being of a qualified individual.
