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CAPITAL GAINS


Excluding the Capital Gain
(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.


Maximum Exclusion

You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true:

  1. You meet the ownership test.
  2. You meet the use test.
  3. 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:

  1. You are married and file a joint return for the year.
  2. Either you or your spouse meets the ownership test.
  3. Both you and your spouse meet the use test.
  4. 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.


Ownership and Use Tests

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:

  1. Owned the home for at least 2 years (the ownership test), and
  2. Lived in the home as your main home for at least 2 years (the use test).


More Than One Home Sold During 2-Year Period

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:

  1. A change in place of employment,
  2. Health, or
  3. Unforeseen circumstances


Important Note:

For the complete explanation, see IRS Publication 523


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