Pursuant to the 1997 Taxpayer Relief Act, homeowners can now lock in a profit of up to $250,000 ($500,00 if married) and owe nothing to the IRS so long as you, the taxpayer, lived in the home as a personal residence for at least 2 of the past 5 years. Your occupancy of the home does not have to be uninterrupted to meet the two year requirement, and you do not have to be using the home as your primary residence when you put up the for sale sign. So long as you lived in the home for a total of 24 months in the five year period preceding the home sale, you qualify for the capital gain exclusion. There is no requirement that you buy another home with your sale proceeds, and there is no limit on the number of times you can use the home-sale exclusion so long as the sales are at least two years apart. That is correct! You can avail yourself of the capital gain exclusion once every two years.
Qualifications for a Partial Exclusion
So what if you didn’t live in the home for a full two years? If you sell your home within 2 years, say 18 months, the IRS will still allow you to file and qualify for a partial exclusion, known as the reduced gain-exclusion break. This partial exclusion of capital gain is based on the portion of the two-year period you owned and resided in the residence. To qualify for the partial exclusion, the seller must prove that the sale was due to: (1) a change in the place of employment; (2) medical reasons; or (3) some other unforeseen circumstance.
1. Premature Sale Due To Change in Employment
If any member of your household experiences a change in employment such that the new commute is 50 or more miles away from your home, you can say that was the primary reason for your premature home sale, making you eligible for the reduced-gain exclusion.
2. Premature Sale Due To Health Reasons
If you, your spouse, or a co-owner of the property must move to obtain, provide or facilitate the diagnosis, cure, mitigation or treatment of disease, illness or injury, you can say that was the primary reason for your premature home sale, making you eligible for the reduced-gain exclusion.
3. Premature Sale Due To Unforeseen Circumstances
If you, your spouse, any family member who resides on the property, or any co-owner of the property dies, becomes unemployed and collects unemployment benefits, suffers a negative change in employment status, legally separates, initiates divorce proceedings, or has two or more children simultaneously, you can say that was the primary reason for your premature home sale, making you eligible for the reduced-gain exclusion. You can also claim eligibility for the reduced-gain exclusion if your residence is sold after being condemned, seized, or subject to a casualty (disaster).
Special Qualifications For Married Couples Seeking the $500,000 Exclusion
To qualify for the $500,000 exclusion, both the husband and wife must fulfill two additional requirements. First, both the husband and wife must have lived in the residence for two out of the past five years. Second, neither the husband nor the wife may have used the capital gain exclusion in the past two years.
Computing The Amount of the Partial Exclusion
If you qualify for the reduced gain exclusion break, the amount of your profit exclusion is determined as follows:
The number of months you lived in the home as your primary residence
times
The amount of your exclusion ($250,000 if single, $500,000 if married) divided by
24 months
Let's Demonstrate with an Example.
Assume a single man lived in his home for 18 months, and due to a medical emergency that required treatment in another city he sold his home and realized a profit of $250,000. Had he lived in the home for 24 months, he would owe no tax. But, to determine the Reduced Gain Exclusion Break, we would perform the following calculation:
18 months times $250,000 (Single person’s exclusion) divided by 24 months equals $187,500.
IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained on this web site is not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed on a taxpayer under the U.S. Internal Revenue Service.
