Know the Rules for Home Sale Tax Savings
The home sale exclusion is one of the biggest and best tax breaks for individuals.
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The requirements to qualify are this:
As long as you’ve owned and used your home as a your principal residence for at least two years out of the prior five years, you can elect to exclude from tax up to $250,000 of home sale profit for a single filer or $500,000 for joint filers.
Additionally, there is no limit on the number of times you can claim the exclusion.
If you file a joint return, you can claim the maximum exclusion if (1) either spouse meets the two-year ownership rule, (2) each spouse meets the two-year use rule and (3) neither spouse has elected the exclusion within the last two years.
This is particularly important to remember for those who have divorced or remarried or will do so soon.
For example, your fiancé sold a home in 2016 and claimed the exclusion as a single taxpayer. If you get married and sell your home, which you owned before the marriage, in 2017 you can’t claim the larger $500,000 joint-filer exclusion. You can only claim the smaller $250,000 exclusion. This could result in a taxable capital gain that could be taxed at up to 15% or 20%. You might also owe the 3.8% net investment income tax on the taxable portion of your home sale profit. You may want to wait to sell your home until after both you and your spouse have lived there for at least two years so you can claim the larger $500,000 joint-filer exclusion. Note too that the maximum exclusion for married filing separately is $250,000.