If you owned and lived in your home for two of the last five years before the sale, then up to $250,000 of profit may be exempt from federal income taxes. If you are married and file a joint return, then it doubles to $500,000.¹
To qualify for this exemption, you cannot have excluded the gain on the sale of another home within two years to this sale. Please consult a professional with tax expertise regarding your individual situation.²
This profit would be excluded from your taxable income. In fact, the sale may not need to be reported unless you receive a Form 1099-S or do not meet the above requirements.
If you sold your home at a loss, unfortunately, you can’t deduct the loss.
THERE ARE EXCEPTIONS
Even if you do not meet the above requirements, you may qualify for this exclusion:
- If you receive the house in a divorce settlement,
- Where you are able to count short-term absences as time lived in the house
- When a surviving spouse who has not remarried can count the time that the deceased spouse lived in the house.
The five-year test period can also be suspended for up to ten years in cases where any spouse has served on “qualified official extended duty” as a member of the military, foreign service or federal intelligence agencies.
Even if you don’t pass the five-year rule test, a reduced exclusion may be available if you have a change in employment or health, or because of unforeseen circumstances, such as divorce or multiple births from a single pregnancy. Please speak with a professional with tax expertise regarding your situation.
- IRS.gov, 2016
- The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties.