Tax Implications of Selling Your Main Home

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According to the IRS, homeowners may qualify to exclude from their income all or part of any gain from the sale of their main home.

Taxpayers can exclude up to $250,000 ($500,000 Married Filing Jointly) of gain on the sale of a home. This is known as the Section 121 Exclusion.

To claim the exclusion, the homeowner must meet the ownership and use tests. This means that during the five-year period ending on the date of the sale, the homeowner must have:

1. Owned the home for at least two years during the 5-year period ending on the date of sale,
2. Used the home as a principal residence for at least two years during the 5-year period ending on the date of sale, and
3. Not excluded gain from the sale of another home during the 2-year period ending on the date of sale.

Keep in mind that a main home that sells for lower than purchased is not deductible. Also, reporting the sale of a home on a tax return is required if all or part of the gain is not excludable.

A sale must also be reported on a tax return if the taxpayer chooses not to claim the exclusion or receives a Form 1099-S, Proceeds from Real Estate Transactions.

Other Circumstances

If the taxpayer does not meet the 2-year ownership and use tests or has already excluded gain from the sale of another home during the 2-year period prior to the sale of a current home, the taxpayer may qualify for a reduced exclusion if the primary reason for the sale is due to a change in place of employment, health reasons, or unforeseen circumstances.

Examples of unforeseen circumstances that may qualify for a reduced exclusion include:

• Involuntary conversion of home.
• Natural or man-made disasters, acts of war, or terrorism.
• Death.
• Unemployment.
• Change of employment resulting in an inability to pay reasonable basic living expenses.
• Divorce or legal separation.
• Multiple births resulting from the same pregnancy.
• Any other event the IRS determines to be an unforeseen circumstance.

What About Househackers?

House hackers (owners who live in one portion of their home and rent out another portion) can only exclude the owner-occupied portion from capital gains.

The rental portion will be subject to capital gains and depreciation recapture tax unless you perform a 1031 exchange to defer your tax liability.

More information is available in Publication 523, Selling Your Home. As always, contact a CPA for more information about Section 121 and how it pertains to you.