“Hi Gary. My wife and I plan to sell our home and we’re pretty sure we’re exempt from paying taxes on our gain. How does that work?”
In 1997, Congress gave you and me a particularly generous tax break. IRS Code Section 121 lets you sell your principal residence and exclude all your gain up to $250,000 (individuals) or $500,000 (couples).
To qualify for this whopping tax break, you must follow three simple rules:
1. “Own 2 of 5 Years” Rule (aka “ownership test”):
You must own the home as your principal residence at least 2 of the 5 years prior to closing your home sale.
2. “Occupy 2 of 5 Years” Rule (aka “use test”):
You must use the home as your principal residence at least 2 of the 5 years prior to closing your home sale. (The 2 years need not be consecutive; e.g. you can live there for 18 months, move for a year, then move in again for 6 months.)
3. “Only Once Every 2 Years” Rule:
You must wait at least 2 years after using this exclusion to do it again.
There are exceptions to these three rules that mean you may yet be eligible for a reduced exclusion that could still cut your tax bill to zero. You may qualify if any of the following happened to you, your spouse, a family member, or a co-owner:
- Job-related move over 50 miles
- Health-related move
- Unforeseen circumstances, such as death, divorce, loss of job, multiple births from the same pregnancy, etc.
As I am not a tax professional, please see a tax specialist to verify this information and answer questions particular to your situation.