For many years, people selling their homes could avoid taxes
simply by buying and occupying a new home costing as much or more
than the home sold. Since 1997, those rules no longer apply.
For many years, people selling their homes could avoid taxes simply by buying and occupying a new home costing as much or more than the home sold. After reaching age 55, you could take a one-time gain exclusion of up to $125,000. Since 1997, those rules no longer apply.
Now if you sell your home, you may be able to exclude profit up to $250,000 if you’re single and $500,000 if you’re married and file a joint return. There’s no age requirement and you can take the exclusion as often as every two years.
To qualify, you must own and live in your home for at least two of the five years before you sell it. You may still qualify for a partial gain exclusion when you fail the two-year test because of a job change, illness or certain other unforeseen circumstances.
There are some tax traps and tax-saving opportunities with home sales. If you’ve claimed home office deductions, you could end up paying taxes on a portion of the profit. With proper planning, you can limit the taxable portion to the depreciation you’ve deducted since May 6, 1997. The key is not to use the home office for two of the five years before selling your home.
To limit the taxable gain when you sell a second home or rental house, consider making it your main home for two years. When the two-year period is up, you may be able to sell the house and exclude part or all of the gain.
The home sale rules allow some flexibility for homeowners who are getting divorced. If you find yourself in this situation, it’s advisable to get details on how the rules apply to you.
The home sale rules can be very complex and planning is essential to maximize the tax breaks. If you’re thinking about selling, call us for an appointment to discuss tax-cutting opportunities.
-Doug Herring is a CPA with the accounting and business consulting firm of Bianchi, Lorincz & Co. in downtown Hollister and in Morgan Hill.