If you are planning to sell your home, please keep the following information in mind. The Internal Revenue Code provides a $500,000 exclusion on the gain from the sale of a personal residence for married filing joint filers and $250,000 exclusion for all other filers. The gain or loss is computed based on the selling price less expenses of the sale and the adjusted basis (original purchase price plus improvements) in the residence. For example, a married couple sells their home for $450,000. The couple originally paid $300,000 for their home fifteen years ago, and the couple paid selling expenses of $25,000. The $125,000 gain would be excluded from tax because the $500,000 exclusion amount exceeds the amount of the gain.
In order to qualify for the exclusion the taxpayer must meet three tests.
1. Ownership – The taxpayer has to own the residence for at least a total of two years within a five year period before the date of sale.
2. Use – The taxpayer must have occupied the residence as a principal residence for periods adding up to at least two years within the five-year period ending on the date of the sale.
3. One Sale in Two Years – The taxpayer must not have used the exclusion for any other residence sold during the two-year period ending on the date of the current sale.
If you receive an informational income-reporting document, such as a 1099-S, you must report the sale of your home, even if the gain from the sale is excludable.
The above information highlights the basic information on selling your home residence. If the residence contains a home office, or it has been turned into rental property before the sale occurred, there will be additional tax planning involved. If you have questions related to the sale of your home, please contact us.