Sold or Selling Your Home? Learn How to Avoid Paying Taxes!
This year has been a good opportunity to sell your home at a peak price. If you were one who took advantage of these prices, wait to hear more good news: when you sell your main home, you may qualify to exclude up to $250,000 of that gain from your income if you are filing single or $500,000 if you are filing married jointly, this means you pay zero taxes on the gain. There are two main tests you need to pass to be able to exclude the gain from your income:
1. Ownership test
2. Use test
You are eligible for the exclusion if you have owned and used your home as your main home for at least 24 months out of the five years prior to the date of sale. The 24 months don’t have to be consecutive either. For a married couple filing jointly, only one spouse has to meet the ownership requirement but for the use requirement, both spouses need to reside in the home for at least 24 months.
You will not qualify to exclude the gain from the sale of your home if you have excluded the gain from the sale of another home during the last two years from the sale of the home in discussion.
Let’s walk through the process together with the diagram.
There are some things that will automatically disqualify you from being able to exclude the gain, and these are:
You acquired the property through a like-kind exchange (1031 exchange), during the past 5 years.
You are subject to the expatriate tax.
If you didn’t meet the 24-month period ownership and use tests, you can take a partial exclusion of the income if the reason for not meeting it was due to work-related move, health-related move, or unforeseeable event move.
Now, if you used your home for business or as a rental property, you can still fully exclude the gain if you were not using the space for business or rental at the time you sold the property, you didn’t earn any business or rental income from the space in the year you sold the home, and you used the space as residence space for 2 years out of the 5 years leading up to the sale.
Make sure to reach out to your tax professional if you have any questions.
