Real Estate Agent · Southampton, NY · Member since 2024 · 81 posts · 24 votes
Can someone please explain the IRS rule that allows homeowners to avoid paying taxes on up to 500k in profit from selling their primary residence? Like what is the specific criteria that this deal and property has to meet? CPA advice is preferred but of course everyone is more than welcome to reply. Thanks!
To qualify for the exclusion, you must have used the home you sell as your principal residence for at least two of the five years prior to the sale. Your principal residence is the place where you (and your spouse if you're filing jointly and claiming the $500,000 exclusion for couples) live.
You can only have one principal residence at a time. If you live in more than one place—for example, you have two homes—the property you use the majority of the time during the year will ordinarily be your principal residence for that year.
If you have a second home or vacation home that has substantially appreciated in value since you bought it, you'll be able to use the exclusion when you sell it if you use that home as your principal home for at least two years before the sale.
$500,000 Exclusion for Married Couples
There are certain additional requirements you must meet to qualify for the $500,000 exclusion. Namely, you must be able to show that all of the following are true:
you are married and file a joint return for the year
either you or your spouse meets the ownership test
both you and your spouse meet the use test, and
during the 2-year period ending on the date of the sale, neither you or your spouse excluded gain from the sale of another home.
If either spouse does not satisfy all these requirements, the exclusion is figured separately for each spouse as if they were not married. This means they can each qualify for up to a $250,000 exclusion. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. For joint owners who are not married, up to $250,000 of gain is tax free for each qualifying owner.
If your spouse dies and you subsequently sell your home, you qualify for the $500,000 exclusion if the sale occurs within two years after the date of death and the other requirements discussed above were met immediately before the date of death.
To qualify for the exclusion, you must have used the home you sell as your principal residence for at least two of the five years prior to the sale. Your principal residence is the place where you (and your spouse if you're filing jointly and claiming the $500,000 exclusion for couples) live.
You can only have one principal residence at a time. If you live in more than one place—for example, you have two homes—the property you use the majority of the time during the year will ordinarily be your principal residence for that year.
If you have a second home or vacation home that has substantially appreciated in value since you bought it, you'll be able to use the exclusion when you sell it if you use that home as your principal home for at least two years before the sale.
$500,000 Exclusion for Married Couples
There are certain additional requirements you must meet to qualify for the $500,000 exclusion. Namely, you must be able to show that all of the following are true:
you are married and file a joint return for the year
either you or your spouse meets the ownership test
both you and your spouse meet the use test, and
during the 2-year period ending on the date of the sale, neither you or your spouse excluded gain from the sale of another home.
If either spouse does not satisfy all these requirements, the exclusion is figured separately for each spouse as if they were not married. This means they can each qualify for up to a $250,000 exclusion. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. For joint owners who are not married, up to $250,000 of gain is tax free for each qualifying owner.
If your spouse dies and you subsequently sell your home, you qualify for the $500,000 exclusion if the sale occurs within two years after the date of death and the other requirements discussed above were met immediately before the date of death.
Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes
2y
Don’t forget. It can’t have been a rental before you made it your primary or you only get a pro-rated tax exemption. It also doesn’t exempt you from depreciation recapture if it was a rental before or after it was your primary.
Section 121 exclusion: exclude the gain from capital gains is what you want to look into.
250k single.
500k if filing jointly.
You need to live in the home for 24 months of the prior 5 years.
Facts and circumstances can change things of course! For instance, you can suspend that 5 years up to 10 years if you are in the military. Have a chat with your accountant about it and make a plan!