Your Home Carries a Huge Capital Gains Exclusion Benefit
By Shane Flait © 2008

Home ownership carries a couple of major tax-benefits. One is the deductibility of your interest portion of your mortgage payments. The other is that much of your gains can be excluded when you sell your home.  Let’s take a look at the latter to show you the conditions under which you can reap ‘tax-free’ so much of the equity increase of you home.

IRS regulations[1] allow you to exclude up to $250,000 of the gain on the sale of your main home if all of the following are true:

1. You meet the ownership test (see below)
2. You meet the use test, and (see below)
3. During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you separately meets those three conditions above.

You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true:

1. You are married and file a joint return for the year.
2. Either you or your spouse meets the ownership test.
3. Both you and your spouse meet the use test.
4. During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home.

Lastly you’ll meet the ownership and use tests if during the 5-year period ending on the date of the sale, you:

·         Owned the home for at least 2 years (the ownership test), and

·         Lived in the home as your main home for at least 2 years (the use test).

Realize that you don’t need to live in the house for 2 consecutive years - just for a total of 2 years within a 5 year period. Secondly, you don’t have to live in it during your ownership. You may perhaps have lived in it as a rental for a total of 2 years before or after you owned it – but within that same 5 years.

Of course the gain on the sale of your home is the difference between the price you sell it for (less expenses of sale) and the price you bought it for. This increase in equity may take many years or not so many (in a hot real estate market).  Using the capital gain exclusion is especially useful if you buy and rehab your home. Just make sure you live in for two years.

 

Shane Flait is a writer and educator. See more at www.EasyRetirementKnowHow.com