Home Sale Tax Exclusions & Legal Requirements
The home sale tax exclusion is one of the most valuable tax benefits available to individuals. It excludes the first $250,000 from the sale of a home, or the first $500,000 from the sale of a home by a married couple in many cases. The exclusion applies whenever you sell a home, as long as you meet its requirements. In other words, you are not limited to using the exclusion once. The exclusion can apply not only to a house but also to a condominium, an apartment, or even a mobile home.
You need to own and occupy the home as your principal residence for at least two years during the five-year period before selling it, so you cannot claim the exclusion more than once in any two-year period. Most people do not find it challenging to meet this requirement. Ownership and occupancy are considered separately, so you do not need to own and occupy the home during the same two-year period. This can help people who rent a home and live in it before they buy it. The period during which they rented the home can count toward the two-year occupancy requirement, even though they did not own it. They still would need to have owned the home for at least two years before selling it, though. Sometimes people move out of their home and rent it to others before selling it. This would not prevent them from using the exclusion, as long as they previously met the occupancy requirement.
The Principal Residence Requirement
You do not need to have constantly lived in your home to meet the principal residence requirement. Vacations do not interrupt a period of residency. If you are gone from your home for a long time, such as a year, this period probably does interrupt a period of residency. You cannot have more than one principal residence at the same time. People who have two homes must determine where they spend the majority of their time, and only that home will count as their principal residence. However, if you sell your principal residence, a second home that you already own may become your principal residence. If you occupy that home as your principal residence for two years, you may be able to apply the exclusion to a sale of that home as well.
The Exclusion for Married Couples
The rules for claiming the $500,000 exclusion for married couples can be more complicated. They must file a joint tax return for the year in which they are applying the exclusion. Both spouses must have occupied the home as their principal residence for two years in the last five years, but only one spouse needs to have owned the home for two years in the last five years. Finally, neither spouse must have excluded any gain from the sale of another home during the two years preceding the sale.
Each spouse will receive a separate exclusion if either of them does not meet these requirements. Each of them then may receive an exclusion of up to $250,000. People who own a home together but are not married each may receive an exclusion of up to $250,000 as well.
If you sell your home after the death of your spouse, you may be eligible for the $500,000 exclusion if your spouse and you met the requirements for the exclusion immediately before their death, and you sell the home within two years of their death.
In some situations, a homeowner may qualify for a partial exclusion if they do not meet the two-year requirement for the main exclusion. They would need to show good cause for the sale, such as health problems or a new job. Good cause also might consist of major unforeseeable events, possibly including the death of a family member, job loss, a divorce, a natural disaster, or the birth of twins or multiples.
Changing your job is automatically considered good cause if the new job is at least 50 miles further away from your home than your old job. Health problems will be considered good cause if you need to move to a different region because of your health or the health of your spouse or co-owner or anyone else who uses the home as their principal residence, as well as any close family member of someone who uses the home as their principal residence.
You will not receive the full amount of the exclusion but instead will receive an amount that is proportionate to the percentage of the two-year requirement that you satisfied. If you owned and occupied the home for 18 months, for example, you may receive 75 percent of the exclusion.
Tax Law Center Contents