(These rules apply to a primary residence only and
not a real estate investment)
You may qualify to exclude from your income all or part of any gain
from the sale of your main home. This means that, if you qualify, you will not have
to pay tax on the gain up to the limit described under Maximum Exclusion, next.
To qualify, you must meet the ownership and use tests.
You can exclude up to $250,000 of the gain on the sale of your main home if all of
the following are true:
- You meet the ownership test.
- You meet the use test.
- During the 2-year period ending on the date of the sale, you did not exclude
gain from the sale of another home. If you and another person owned the home jointly
but file separate returns, each of you can exclude up to $250,000 of gain from the
sale of your interest in the home if each of you meets the three conditions just listed.
You can exclude up to $500,000 of the gain on the sale of your main home if all of
the following are true:
- You are married and file a joint return for the year.
- Either you or your spouse meets the ownership test.
- Both you and your spouse meet the use test.
- During the 2-year period ending on the date of the sale, neither you nor your spouse
excluded gain from sale of another home. If either spouse does not satisfy all these
requirements, the maximum exclusion that can be claimed by the couple is the total of
the maximum exclusions that each spouse would qualify for if not married and the
amounts were figured separately. For this purpose, each spouse is treated as owning the
property during the period that either spouse owned the property.
To claim the exclusion, you must meet the ownership and use tests. This means that
during the 5-year period ending on the date of the sale, you must have:
- Owned the home for at least 2 years (the ownership test), and
- Lived in the home as your main home for at least 2 years (the use test).
You cannot exclude gain on the sale of your home if, during the 2-year period ending
on the date of the sale, you sold another home at a gain and excluded all or part of
that gain. If you cannot exclude the gain, you must include it in your income.
Exception. You can still claim an exclusion, but the maximum
amount of gain you can exclude will be reduced, if the primary reason you sold the home was:
- A change in place of employment,
- Health, or
- Unforeseen circumstances
For the complete explanation, see
IRS Publication 523