TAX-FREE HOME SALES
When President Clinton inked the Taxpayer Relief Act of 1997 on
Generally, when you sell an asset for more than you paid, you incur a tax on the profit. This general rule applies to the sale of your home as well. However, under the new law, as long as this profit is less than $250,000 ($500,000 for joint filers) the gain will not be taxed. That's right, as long as you meet a few simple rules, gains of up to $250,000 ($500,000 for joint filers) on the sale of a home go untaxed.
JUST FOLLOW THE RULES
Here's how it works: First, in order to qualify for the exclusion you must have owned and used the property as your principal residence for 2 out of 5 years prior to the date of sale. Second, you must not have used the exclusion in the 2-year period prior to the sale.
For married taxpayers who file a joint return the exclusion is $500,000. In this case, only one spouse need meet the 2 out of 5 year ownership requirement, but both spouses must meet the 2 out of 5 year use requirement. That is, if the husband has owned and used the house as his principal residence for 2 of the last 5 years, but his wife did not use the house as her principal residence for the required 2 years, then the exclusion is only $250,000.
For those who leave their home because of a disability, a special rule makes it easier to meet the 2-year requirement In such cases, if you owned and used the home as a principal residence for at least 1 in the 5 years preceding the sale, then you are treated as having used it as your principal residence while you are in a facility that is licensed to care for people in your condition. This rule enables the family to sell the home to raise cash for the expenses without incurring a large tax bite.
Other special use and ownership rules apply in the case of a deceased spouse and in the case of divorce.
If you sell a residence and elect the exclusion, then you have to wait
another 2 years before another exclusion is available.
However, partial benefits are available on the sale of any principal residence
if the sale is due to a change in place of employment, health or other
"unforeseen circumstances" to be defined in regulations. If that's
the case, then you get a slice of the $250,000 ($500,000 for joint filers) exclusion.
For example, lets say you
sell a home on
These new rules apply to home sales after
In the first version of this article, I warned readers that these rules only
applied on the federal level, and that gains from the sale of a home were fully
Last revised 12/2/2005