If you sold your home and made money in the process, the IRS wants to know about it! However, some or all of the profit you realized on the sale of your home may be elgible for exclusion from your income. Depending on certain qualifications, the IRS allows the exclusion of up to $250,000 ($500,000 for married couples filing jointly) of the realized gain from the sale of your home.
To qualify for the maximum exclusion, your situation must meet the following minimum requirements:
* The property must be an actual home owned by you for at least two years of the five year period prior to the date you sold your home. For the purposes of this tax benefit, the IRS defines a home as a house, houseboat, mobile home, cooperative apartment, or a condominium. Basically, a home can be a living place that contains sleeping quarters, a cooking area or kitchen, and a toilet.
* Your home must be your main home; the home in which you lived for two years of the five year period ending on the date of the sale. For example, if you lived in a rental apartment or other location for more than two of the last five years, you cannot take this exclusion on a home that you owned and then sold.
* You must not have excluded gain from the sale of another home in the two-year period prior to the sale of your home. The IRS doesn’t allow you to exclude the income of the sale of more than one home in a two-year period.
If the sale of your home meets these criteria, then all of the capital gain (or revenue above expenses) you realized on the sale of your home up to $250,000 or $500,000 for married couples can be excluded from your income.
There are also exceptions to the two-year rules:
* If you sold your house because your job changed to a different location, you can exclude some, but not all of the gain from your income.
* Health and medical concerns are also exceptions to the two-year rules. Be sure to keep documentation from your physician to show the medical reasons for selling your home.
* The IRS allows exceptions for unforeseen circumstances and defines these events as “events that could not reasonably have been anticipated before buying and occupying your main home.” Events such as natural disasters, acts of war or terrorism, death, divorce, and even multiple births from the same pregnancy are examples of unforeseen circumstances.
These criteria will allow you to still take advantage of the IRS exclusion, but you can only exclude a portion of the realized gain based on the time you actually lived in the home. The portion of the gain that can be excluded is calculated based on the ratio derived by the number of months you lived in your home divided by 24.
For example, if you lived in the home for six months, your ratio is .25. To figure your maximum allowable gain exclusion, you would multiply this number by $250,000 or $500,000, depending on your filing status. In this case, up to $62,500 can be excluded for single homeowners, and up to $125,000 can be excluded for married couples.
Figuring your gain or loss in the sale of the home is fairly straightforward. To figure your cost basis, the closing costs, subsequent improvements, and selling costs are added to the original purchase price of your home. Subtract from this the accumulated depreciation (home office deductions, etc.) for your final cost basis. Then, subtract your cost basis from your final selling price to determine your gain (or loss).
Selling your home for a profit doesn’t always mean you’ll owe the IRS at the end of the year. Take a little extra time to figure the capital gains realized on the sale of your home, follow the IRS guidelines listed here, and you can probably save hundreds or even thousands of dollars at tax time. For more information, consult Publication 523 from the IRS.