Are you considering selling your home? If so, it can be important to understand the home sale tax exclusion so you can take steps to help make sure you qualify for the tax benefit, even if it means adjusting your plans by a few months. The amount of the exclusion differs if you are single or married, and if you are selling your home due to a separation or divorce, you may want to take the sale into account when figuring out your timeline.

Proceeds from a home sale are usually taxed as capital gains rather than as ordinary income. The tax rates for capital gains are different, currently lower, than regular income tax rates, ranging from 0 to 20% depending on your total income. Capital gains is the amount of appreciation your home has accrued since the time of purchase, and typically covers the amount you will make when you sell your home for more than you originally paid for it. 

Whatever your capital gains tax bracket, there is an exclusion from any tax liability up to a ceiling. A married couple with up to $500,000 in capital gains filing a joint tax return for the year in which the couple’s home is sold can exclude the entire amount of gains from being taxed. A single person, or someone who is married but filing taxes separately from his or her spouse, can exclude up to $250,000 in capital gains. 

If you are married and you bought your house for $100,000 you could sell it for up to $600,000 now and not have any tax liability, because the difference is under $500,000. If you are single or married filing separately and bought your house for $100,000, you can sell it for up to $350,000 without tax liability.

Only your primary residence qualifies. You must also meet the “2-2 Rule” for use and ownership to qualify for the home sale tax exclusion. There are two tests under this rule:

1. You have owned the home for 2 out of the last 5 years (“ownership test”) and

2. You have lived in and used the home for 2 out of the last 5 years (“use test”).

These two periods of time do not have to be the same, or overlap with each other, but both must have occurred during the 5 years (60 months) prior to the sale of your home.

You are generally ineligible for the home sale tax exclusion if you excluded the gain from the sale of another residence during the two-year period prior to the sale of this primary residence. So, the exclusion is less useful if you tend to move frequently, or flip houses. In addition, if you were separated or divorced prior to the sale of a home, there are special rules that may apply. Ask your attorney for details to see whether the terms of your separation or divorce agreement could be altered to benefit both you and your spouse or former spouse.

For more information about the home sale tax exclusion and how you can qualify for it, please feel free to contact our office to schedule an appointment.