You May Qualify to Sell Your Home Tax-Free
You can sell your home tax-free if it is sold within Internal Revenue Service(IRS) tax exclusions. The exclusions cover the price of an average home if you are single and live in an area of moderately priced homes. The tax exclusion you are entitled to doubles if you are married, and file taxes jointly.
The type of home covered includes single-family homes, condominiums, cooperative apartments, mobile homes or a houseboat. To qualify for the tax breaks at the sale of your home your home must meet what the IRS calls “the eligibility test”.
If your home is above the exclusion limits to qualify as a tax-free sale, you will still get a tax break even if you don’t purchase another home. You can sell your home tax-free if the gain on your sale is $250,000 or less if you are single and $500,000 or less
if you are married filing jointly.
Here is how the $250,000 or $500,000 home sale exclusion is applied:
- When you owned the home and used it as your main home during at least 2 of the last 5 years before the date of sale.
- If you did not acquire the home through a like-kind exchange (also known as a 1031 exchange), during the past 5 years.
- You did not claim any exclusion for the sale of a home that occurred during a 2-year period ending on the date of the sale of the home, the gain from which you now want to exclude.
If one or more of these are not true, you might still be eligible. Keep reading to find out.
Transfer of your home. When your home is transferred (or share of a jointly owned home) to a spouse or ex-spouse as part of a divorce settlement, you are considered to have no gain or loss. You have nothing to report on your tax forms and this entire publication does not apply to you.
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Your Main Home is your Tax-Break
The test when you own or live in more than one home, the test for determining which one is your main home is a “facts and circumstances” test. The most important factor is where you spend the most time. However, other factors can enter the picture as well. The more of these that are true of a home, the more likely it is your main home:
- The address listed on your:
- U.S. Postal Service address,
- Voter Registration Card,
- Federal and state tax returns, and
- Driver’s license or car registration.
- The home is near:
- Where you work,
- Where you bank,
- The residence of one or more family members, and
- Recreational clubs or religious organizations of which you are a member.
Here are the Details of the Eligibility Tests
There are six eligibility factors the IRS uses to determine if your home qualifies for a tax exclusion when it is sold. 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 Eligibility test.
Eligibility Step 1—Automatic Disqualification
Determine whether any of the automatic disqualifications apply. Your home sale is not eligible for the exclusion if ANY of the following is true:
- You acquired the property through a like-kind exchange (1031 exchange), during the past 5 years. See Pub. 544, Sales and Other Dispositions of Assets.
- You are subject to expatriate tax. For more information about expatriate tax, see chapter 4 of Pub. 519, U.S. Tax Guide for Aliens.
You must figure out your gain or loss using the IRS formula listed in the IRS publication on, “Selling Your Home”.
Eligibility Step 2—Ownership
Determine whether you meet the ownership requirement. Your home was owned by you for 24 months (2 years) during the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement.
You received Form 1099-S, Proceeds from Real Estate Transactions, the date of sale appears in box 1 of Form 1099-S.
If you did not receive Form 1099-S, the date of sale is either the date the title transferred or the date the economic burdens and benefits of ownership shifted to the buyer, whichever date is earlier. (In most cases, these dates are the same.)
Eligibility Step 3—Residence
Determine whether you meet the residence requirement. If your home was your residence for at least 24 of the months you owned the home during the 5 years leading up to the date of sale, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period.
It doesn’t even have to be a single block of time. All you need is a total of 24 months (730 days) of residence during the 5-year period.
If you were ever away from home, you need to determine whether that counts as time living at home or not. To not exceed the residency requirement, a vacation or other short absence can count as the time you lived at home (even if you rented out your home while you were gone).
If you have a disability and are physically or mentally unable to care for yourself, you only need to show that your home was your residence for at least 12 months out of the 5 years leading up to the date of sale.
In addition, any time you spend living in a care facility (such as a nursing home) counts toward your residence requirement, so long as the facility has a license from a state or other political entity to care for people with your condition.
Eligibility Step 4—Look-Back
Determine whether you meet the look-back requirement. 1) If you did not exclude the gain when selling a home on your tax returns for the previous two years. 2) And you do not intend to do so on any returns or amended returns for the past two years that have not been filed. The look-back requirement has been met by you.
Eligibility Step 5—Exceptions
Check to see if there is anything about your situation that could affect your answer to Eligibility Step 2—Ownership through Eligibility Step 4—Look-Back. You’ll need to review the IRS section, Does Your Home Qualify-Details and Exceptions in the IRS “Selling Your Home” publication 523.
- A marriage, separation, divorce, or the death of a spouse occurred during the ownership of the home.
- The sale involved vacant land.
- What you sold was a “remainder interest” (such as ownership of a home in which another person has the right to live for the rest of their life).
- Your previous home was destroyed or condemned.
Eligibility Step 6—Review
Review your eligibility. If you meet the ownership, residence, and look-back requirements, your home sale qualifies for exclusion, then you would use the IRS rules to figure out your gain or loss in the IRS publication 523.
If you did not meet all the tests in Eligibility Step 1 through Eligibility Step 5, earlier, your home is not eligible for the full maximum exclusion. However, you may still be eligible for partial exclusion. When you can show the main reason you sold your home was because of a change in workplace location, for health reasons, or because of an unforeseeable event, these may qualify as partial.
The IRS rule that allows you to sell your home tax-free if the gain is at or under $250,000 ($500,000 if married filing joint), has other advantages as well, you can
1. Keep more or all of your profit when you sell.
2. Gives you more money for the down payment on your next purchase.
3. Allows money to pay off bills, fund vacations or educations, purchase a car, boat, etc.
4. Allows no time frame to worry about purchasing another house.
5. Sell your rental house now tax-free if it was your primary residence any 2 of the past 5 years.