There comes a day when you might want to sell your own home. Knowing about the different tax breaks available is a golden opportunity for you to make more profit.
You may already know about mortgage interest and property tax deductions, but did you know about the home sale tax exclusion?
Homeowners who qualify for this exclusion may make up to $250,000 dollars. They can do anything they wish with their tax-free proceeds and are not required to invest that money in a new home either.
Below are the requirements needed in order for you to qualify for such a generous tax exclusion:
According to the latest data, Americans change their residence once every seven years. In order for you to qualify for this exclusion, you must own and occupy your home as your main residence for at least two years before selling it. Examples of homes may include apartments, houses, condominiums and grounded mobile homes as well.
One important thing to note is that ownership and use of the home itself are two separate things. They do not need to take place at the exact same time.
This means that if you’ve paid rent while living in your home before actually purchasing it, it also counts as use of your home for the purpose of the exclusion.
The best part about this tax exclusion is that you can use it every time you sell your primary home. So this enables you to make tax-free profits of $250,000 or $500,000 depending on your filing status.
If you and your spouse meet certain requirements, then you are entitled to the generous $500,000 exclusion. These requirements include:
- Being married and filing a joint return for the year.
- Either you or your spouse are able to meet the ownership test. This means that if you owned your home for the past two years and got married within that time-frame, adding your spouse to the title. Then as joint filers, you have absolutely no problem meeting the ownership test.
- Both you and your spouse must meet the use test. You must each live in the residence for two years.
- During the two-year period ending on the date of the sale, you and your spouse must have proof that neither of you have excluded gain from the sale of another home.
If one of you does not meet all of the above requirements, then you must work out the exclusion separately, as if you are not a married couple. This means that you can each qualify for up to a $250,000 exclusion.
Certain people such as members of the military receive special home-sale consideration. Due to redeployments, soldiers often find it difficult to meet the residency requirement and end up owing taxes when they sell their home.
Luckily, a law amendment in 2003 opened the doors for exemption from the two-year use requirement. Military personnel are now qualified for full exclusion for up to ten years.