Selling Your Home

by Lee Reams in 1040 & Personal Finance

During the summer months, many people sell their home and move to a new location. Now that the stress of the move is over, they may be wondering about the tax ramifications of the sale. Luckily, many of those individuals who made a profit on the sale will not have to pay a single dime of additional income tax to the IRS.

Generally, a profit is made if the selling price of a home is greater than the sum of the price that was paid to purchase the home, the costs of improvements made during the ownership period, and sales expenses such as commissions. That profit, considered a capital gain, is usually subject to income tax. However, under certain circumstances, the law allows a taxpayer to exclude all or part of that gain from his or her incomethat is, tax may not have to be paid on the profit.

Individuals may be able to exclude up to $250,000 of capital gain on the sale of their home, and married taxpayers filing joint returns may be able to exclude up to $500,000. The exclusion may be claimed each time that the main home is sold, but generally not more than once every two years. An unmarried surviving spouse may be able to exclude $500,000 of gain if the sale occurs no later than two years after the date of the other spouse's death.

To qualify, both the ownership and use tests must be met.

• Ownership Test: During the five-year period ending on the date of the sale, the taxpayer must have owned the home for at least two years.
  
  
• Use Test: During the five-year period ending on the date of the sale, the taxpayer must have lived in the home as his or her main home for at least two years.

If a taxpayer files a joint return with his or her spouse and both meet the use test, the taxpayer normally will be able to claim the exclusion for married couples even if only one of them meets the ownership test.

If these tests are not met, a reduced amount of the gain realized on the sale of a home may still be excluded. But the home must have been sold for other specific reasons, such as serious health issues, a change in the place of employment, or certain unforeseen circumstances (such as a divorce or legal separation), natural or man-made disasters resulting in damage to the home, or an involuntary conversion of the home (for example, a condemnation).

For individuals on qualified official extended duty in the U.S. Armed Services, the Foreign Service, or the intelligence community, the five-year test period may be suspended for up to ten years. It is considered qualified extended duty when, for more than 90 days or for an indefinite period, that individual is:

• At a duty station that is at least 50 miles from his or her main home, or
  
  
• Residing under government orders in government housing.

Intelligence community members must serve on extended duty at a duty station that is located outside the United States.

If a taxpayer has more than one home, only the gain from the sale of his or her main home may be excluded. The gain from selling any other home is taxable. If someone has two homes and lives in both of them, his or her main home is ordinarily the one he or she lives in most of the time.

Unfortunately, when a home is sold at a loss, the loss generally is not deductible since the home is personal use property and tax law does not permit a deduction when personal use property is sold at a loss.

Additional complications may apply if the home was acquired via a tax-deferred exchange, was previously a rental, or was used partially for business.

If you have questions related to your specific circumstances, please give one of our professionals a call.