Requirements to Qualify
The IRS allows up to $250,000 of profit on a home’s sale to be excluded from your tax return. For married couples filing jointly, that amount is increased to $500,000. Any profits over this amount would be taxed as income. In order to qualify for this exclusion, you must meet all of the following requirements:
- Owned the home for at least two years
- Lived in the home for at least two of the last five years
- Not used the tax exclusion on another home sale in the last two years
It’s important to note that the required two years of residence do not have to be the last two years prior to the sale. So, if you owned a home for ten years, then rented it out for the two years prior to selling it, you could still qualify for this exclusion.
If you want to qualify for the joint exclusion of $500,000, then at least one spouse must meet the ownership requirement outlined above, and both spouses must meet the residency requirement.
Special Exceptions
Under certain circumstances, the IRS will make an exception to the requirements given above, and still allow you to qualify for the exclusion. One common exception is given to active-duty members of the armed forces, Foreign Service, of federal intelligence agencies. If you or your spouse is a member of one of these agencies, you can suspend the five-year-test period up to ten years if:
- You’re stationed for more than 90 days at a duty station at least 50 miles from your home, or
- You’re residing in government housing under government orders.
There are other special exceptions to the requirements as well, so be sure to speak to your accountant about this exclusion if you’ve sold a home in the last year.
Reduced Exclusions
If you don’t meet the requirements outlined above, you may still qualify for a reduced exclusion. Common reasons for a reduced exclusion could be:
- Change of employment
- Change of health
- Divorce
- Other unforeseen circumstances
For example, if you have only lived in your home for a year, then change your job and have to move, the IRS will grant a partial exclusion on the gain. Because you lived in the home half of the required time for the full exclusion, you could still exclude up to $125,000 of profit if filing individually, or up to $250,000 if filing jointly.
Claiming the Exclusion
If you qualify for the exclusion as outlined above, most often, you don’t have to report the home sale on your tax return. However, there are many factors that go into determining your qualifications, as well as some complex issues involved with calculating your actual profits from the sale.
So, if you’ve sold a home in the last year, it is strongly recommended that you work with a Provo tax advisor when filing your return. This will offer assurances that you are filing your return correctly, and getting the maximum benefit from the exclusion.