- Home Sale Exclusion
- 2 out of 5 Rule
- Gain or Loss from a Sale
If you have sold your home this year, or are considering selling your home soon, you should be aware of how this will affect your current taxes. There are various issues that can affect your home sale, such as having a home office or day care center, and any past use of the property as a rental. However, this article covers the sale of your personal residence and the gain exclusion you may be eligible for. For most home sellers, communicating your home sale to a tax professional is the last thing on your mind. Each home sale is different so it’s a great idea to reach out to your tax professional to help determine your eligibility.
Home Sale Exclusion – Generally, the tax code allows for the exclusion of up to $250,000 ($500,000 for married couples filing jointly) of gain from the sale of your primary residence if you meet the requirements. However, you also cannot have previously taken a home-sale exclusion within the last 2 years. There is no limit on the number of times you can use this exclusion as long as you meet the time requirements. That said, extenuating circumstances such as business or rental use can reduce the amount of the exclusion and should always be communicated to your tax professional. This home-sale exclusion only applies to a primary residence, not to a second home or a rental property.
2 out of 5 Rule – To qualify for the exclusion on gain from the home sale; you must have owned and lived in the home for at least 2 out of the last 5 years. If you are married, both you and your spouse must meet the use requirement, but only one of you needs to meet the ownership requirement. Vacations, short absences, and short rental periods do not reduce the use period. When only one spouse in a married couple qualifies, the maximum exclusion is limited to $250,000 instead of $500,000.
There are certain partial exclusions that can apply to the sale of your home if you do not meet the above requirements. Common examples are relocating for work, divorce, or death. For these situations it’s recommended for you to reach out to a tax professional to help assist you in determining any exclusion.
Gain or Loss from a Sale – There are multiple items taken into consideration when calculating gain or loss from the sale of your home. The first step is to calculate the tax basis on the home. To do this, you or your tax professional will need to know the following.
- When you purchased the home, and for how much
- A copy of the sellers closing statement
- List of any improvements made to the home since you purchased the home
To determine your taxable gain, the first step is to take the selling price of the home and subtract the original cost and or any improvements you have made to the home (consult your tax professional on eligibility of improvements). Once you have your tax basis the next step is to deduct any expenses related to the home sale, which typically can be found on the closing statement, but also can include expenses paid to get the house ready for sale. Most commonly you will see realtor commissions, and other sale fees, such as title/recording fees. Once you have deducted the selling expenses from your tax basis you will be left with a gain or loss from the sale.
Lastly, in the event of a gain you may qualify for the exclusion above and can reduce the amount of taxable gain. However, you may be required to report the sale of your home even if the gain is considered to be untaxable if you received a Form 1099-S. In the event of a loss, you cannot deduct any loss from a personal home sale.
For business use, rental, or other uncommon home sales please reach out to your tax professional.