Planning to sell your main home but concerned about the U.S. tax on the capital gain from the sale of your main home? You may want check if you can utilize the sale of home exclusion before selling your main home.
What is the sale of home exclusion?
If you are a U.S. citizen or resident who sells your principal residence, you may be eligible to exclude the gain when you sell your principal residence. To qualify for the maximum exclusion of gain ($250,000 or $500,000 if married filing jointly), you must meet the Eligibility Test.
6 Steps to check if you meet the Eligibility Test
Step 1—Automatic Disqualification
Your home sale isn’t eligible for the exclusion if ANY of the following are true.
- You acquired the property through a like-kind exchange (1031 exchange), during the past 5 years.
- You are subject to expatriate tax. For more information about expatriate tax.
If any of these conditions are true, the exclusion does not apply.
If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.
If you owned the home and used it as your residence for at least 24 months during the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it does not have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.
If you did not sell another home during the 2-year period before the date of sale (or, if you did sell another home during this period, but did not take an exclusion of the gain earned from it), you meet the look-back requirement. You may take the exclusion only once during a 2-year period.
Step 5—Exceptions to the Eligibility Test
There are some exceptions to the Eligibility Test. If any of the following situations apply to you, read on to see if they may affect your qualification. If none of these situations apply, skip to Step 6.
- A separation or divorce occurred during the ownership of the home.
- The death of a spouse occurred during the ownership of the home.
- The sale involved vacant land.
- You owned a remainder interest, meaning the right to own a home in the future, and you sold that right.
- Your previous home was destroyed or condemned.
- You were a service member during the ownership of the home.
- You acquired or are relinquishing the home in a like-kind exchange.
- You used the entire property as a vacation home or rental after 2008 or you used a portion of the home, separate from the living area, for business or rental purposes.
Step 6—Final Determination of Eligibility
If you meet the ownership, residence, and look-back requirements, taking the exceptions into account, then you meet the Eligibility Test. Your home sale qualifies for the maximum exclusion.
If you did not meet the Eligibility Test, then your home is not eligible for the maximum exclusion, but you may still qualify for partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event. For more details, please reach out to us.
If gain exceeds the sale of home exclusion amount?
You should also note that gain exceeding the exclusion amount would still be subjected to U.S. tax.
Disclaimer: We have obviously tried to write this article as accurately and in language understandable to most people. As tax rules and laws can be extremely complex, please consult your own tax, legal and accounting advisor about your specific case as the above is not and should not be used as tax advice. This information has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.