Considering selling your home?
Do you know what the tax consequences will be?
Under the home sale tax exclusion rule, you can exempt up to $250,000 of capital gain ($500,000 if youíre married and file jointly) when you sell your primary residence, as long as you used that home as your primary residence for at least two out of the five years before the sale.
For example, suppose you and your spouse bought a home in 1984 for $120,000, and this summer you sold it (without using a broker) for $650,000. Since your capital gain is $530,000, and the rule lets you exempt up to $500,000, youíd only have to pay taxes on $30,000.
Any other requirements under the rule?
No. Unlike the prior rule that governed taxes on home sales, you donít have to buy another home or be a certain age to take full advantage of the exclusion. And, you can apply the exclusion rule when you sell subsequent primary residences.
There are, however, some limitations. The biggest? Since the rule applies to your primary residence, you canít use it to avoid paying taxes on profit you make from selling an investment property or a vacation home. In addition, if your primary residence is a multi-family home, you can only apply the exemption to the portion of the property you live in. So, for example, if you own and live in a three-family home, when you sell it you can only apply the exemption against one-third of the profit.
There is, however, a loophole in the law relating to vacation homes. If, at some point after selling your primary residence, you move into your vacation home and live there full time for two years, it then becomes your primary residence. At that point, if you sell that home, you can take full advantage of the exclusion.