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Sale of Your Home
Selling Your Home
You can exclude up to $250,000 of gain ($500,000 if married filing jointly) on the sale of your home if you meet the use and ownership tests. You must live in the home as your main home for 2 of the past 5 years to meet the use test. You must have owned the home for 2 of the past 5 years to meet the ownership test. These do not have to be the same time period.
Any gain above the excluded amount is subject to tax at the capital gain rates (5 or 15%). If you do not meet the criteria to exclude the gain, the entire gain is taxable. If you have not owned the home for more than 12 months, the gain is taxed at ordinary income rates. If you have owned it for more than 12 months, capital gain rates apply.
Your gain is determined by subtracting your cost basis from the proceeds of the sale. Your cost basis is your original cost plus any capital improvements. If the home has been used as a rental, you must deduct any depreciation from the cost basis. Note that the IRS will reduce your basis whether you take the depreciation deduction or not.
If you qualify to exclude the entire gain, you do not report the sale on your tax return. If any of the gain is taxable, you should file Schedule D as a part of your 1040.
No costs incurred in fixing up or selling the home are deductible expenses.
Reduced Maximum Exclusion
If you do not meet the use and ownership tests, you may be eligible for a reduced maximum exclusion. A reduced maximum exclusion is available if one of the following takes place:
1. You sold the home due to a change in employment. To qualify under this exception, your new place of employment must be at least 50 miles further than the distance from your old home to your old place of employment. In other words, if your old job was 8 miles from your old home, your new job must be at least 58 miles from your old home.
2. You sold the home due to a change in health. To qualify, the move must be for the treatment, cure, mitigation or diagnosis of disease, injury, or illness. Moving just for general health or well-being does not qualify.
3. You sold the home due to unforeseen circumstances. The IRS has listed a number of events that may qualify under this exception:
a. An involuntary conversion of your home.
b. Natural or man-made disasters or acts of war or terrorism resulting in a casualty to your home.
c. Death of a family member living in the home.
d. Unemployment
e. A change in employment that reduces your ability to pay reasonable basic living expenses.
f. Divorce or legal separation.
g. Multiple births resulting from the same pregnancy.
To determine the amount of your reduced maximum exclusion you divide the number of months you have lived in the home by 24 and multiply that by the maximum exemption amount you qualify for. As an example, if you have lived in the home for 18 months and are filing a joint return your maximum exemption amount is 18/24 X $500,000 or $375,000. This means you could exclude any gain up to that amount.
You may not exclude gain on the sale of a home more than once during any two-year period unless you meet one of the exceptions above.
Capital Improvements
Capital improvements are improvements that you make to the home that upgrade the home. Items such as adding a swimming pool, a new room, or upgraded appliances would be capital improvements. Repairs and maintenance such as painting are not considered capital improvements.
