Homeowners that have lived in their primary residence two of the past five years are eligible for a $250,000 capital gains exclusion when they sell it; $500,000 if married and filing jointly. Those that sell their home without meeting the IRS use and ownership tests, may still be able to claim a reduced capital gains exclusion. Are you eligible for the reduce capital gains exclusion?
The basic capital gains tax exclusion for selling your home
Capital gains is defined as the increase in value over and above the initial purchase price, plus the cost of any improvements. Those homeowners that meet the IRS use and ownership tests can exclude up to $250,000 of capital gains or $500,000 if married and filing jointly. The exclusion applies to only one sale or exchange every two years, and any sales made before May 7, 1997 are not taken into account. The exclusion also does not apply to homes which are not used as primary residences, such as vacation or rental property.
What if I sell my home within two years?
The IRS allows certain taxpayers to claim a reduced capital gains exclusion if they sell their home without meeting the ownership and use tests (IRS Publication 523; IRC Section 121). Specifically, those that have to sell their home on short notice because of unforeseen circumstances such as a change in employment, health or other specific unforeseen events, may be eligible. The IRS maintains a strict stance on the definition of an unforeseen event in that the seller must not have been able to reasonably foresee the events that occurred prior to purchasing the home. For instance, selling your home to upgrade to a larger home would not be considered a reasonable unforeseen event.
How does the reduced maximum capital gains exclusion work?
If you experienced an unforeseen event, you would be eligible to claim a prorated portion. For instance, if you had to change employment after a year and half of owning your home and needed to move to another city, you could deduct 18 months divided 24 months multiplied by the $250,000 capital gains exclusion. This would translate into a total allowable exclusion of $187,500 which would be twice that if you are married and filing jointly. For reporting the capital gain and exclusion on your tax return, refer to IRS publication 523 and form 8949 instructions.
More questions? Ask your capital gains exclusion questions online.
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