Home Sale Exclusion

 

Editor’s Note: Homeowners listen up! We’ve got more information about home sale exclusions, which relates to your ability to exclude gain on the sale of your home.

Home Sales Tax – 101

tax property saleA home sale often doesn’t affect your taxes. If you have a loss on the sale, you can’t deduct it from income. But, if you make a profit, you can often exclude it. This is called “home sale exclusion”, or less commonly “sale of a personal residence exclusion”.

Selling a Home – Taxes 102

To exclude a tax on a property sale’s profit — which is a capital gain — you must pass these tests:

  • Ownership test — You must own the home for at least two of the last five years, ending on the date of sale.
  • Use test — You must live in/use the home as your main home for at least two of the last five years, ending on the date of sale. For sales of homes after Dec. 31, 2008, periods of nonqualified use might reduce your exclusion amount. A period of nonqualified use is any period when one of these people don’t use the home as a main home:
    • You
    • Your spouse
    • Your former spouse

You can’t use this exclusion for any home sold in the two-year period. The two-year period ends on the date of the current sale.

The ownership and use periods don’t have to be continuous. You pass the tests if you show that you owned and lived in the home for either:

  • 24 full months
  • 730 days in the past five years

You can count short, temporary absences as periods of use. (Ex: vacations or seasonal absences) This applies even if you rent out the home in your absences.

The amount of sale of personal residence exclusion

The gain from the sale of your home is tax-free if all of these apply:

    • You (or your spouse, if married filing jointly) meet the ownership test.
    • You and your spouse (if married) file married filing jointly or married filing separately.

You have a gain of:

      • $250,000 or less
      • $500,000 or less, if married filing jointly

Your gain might be more than the exclusion amount for your filing status. If so, only the excess amount is taxable. Example: You and your spouse make a profit of $562,000. Only $62,000 is taxable.

You can claim the $500,000 exclusion on a joint return if all of these apply:

  • You and your spouse are married and file as married filing jointly.
  • Either you or your spouse meets the ownership test.
  • Both spouses meet the use test.
  • Neither you nor your spouse excluded gain from the sale of another home in the two-year period ending on the date of the sale.

Don’t report the sale of your main home on your return unless one of these applies:

  • Some or all of your gain is subject to tax.
  • You received Form 1099-S. If so, you must report the sale even if you have no taxable gain to report.

Sale of Home Tax Form

If you have a taxable gain on the sale of your main home that you can’t exclude, report the entire gain on Form 8949.

If you have a loss on the sale of your main home and received a Form 1099-S, report the loss on Form 8949. You’ll do this even though the loss isn’t deductible.

You can use your settlement statements from both the home’s sale and the home’s purchase to help determine:

  • Your adjusted basis in the home
  • Amount of gain or loss on the sale

You can also use documents about your home improvements to help figure your adjusted basis in the home.

Selling a Home – Taxes 103

Getting a reduced home sale gain exclusion

You might qualify for a reduced home sale gain exclusion if the main reason for the home sale was due to certain changes impacting a qualified individual. This applies even if you:

  • Don’t pass the use and ownership tests
  • Have used the exclusion within two years of selling your current home

A qualified individual is one of these people:

  • You
  • Your spouse
  • Co-owner
  • Resident

You can usually claim a reduced exclusion if you sell your main home for one of these reasons:

  • You relocated for new employment and both of these apply:
    • Your new job is at least 50 miles farther from your new home than your previous job, or you began a new job at least 50 miles from the home.
    • Your change of employment occurred while you owned and used the property as your main home.
  • A family member living in your home has a disease, illness, or injury. So, the sale of the main home is mainly to:
    • Get, provide, or facilitate one of these for yourself or a family member:
      • Diagnosis
      • Cure
      • Mitigation
      • Treatment
    • Change homes if a doctor recommends a change of residence. This could be due to an issue in getting or providing medical or personal care for the suffering person.
    • Family member includes:
      • Spouse
      • Parent
      • Grandparent
      • Stepmother or stepfather
      • Child, grandchild, stepchild, adopted child, or eligible foster child
      • Brother, sister, stepsibling, or half sibling
      • Mother-in-law, father-in-law; brother-, sister-, son-, or daughter-in-law
      • Uncle, aunt, nephew, or niece
    • A health-related move exception also applies if the impacted person is a co-owner of the home or any other resident of the home.

A move isn’t considered to be due to health if the move only benefits general health and well-being.

  • Unforeseen circumstances arose. These include:
    • Involuntary conversions (Ex: your property is destroyed, condemned, or under threat of condemnation)
    • Natural or man-made disasters or an act of terrorism
    • Death
    • Divorce
    • Multiple births from the same pregnancy
    • Became eligible for unemployment compensation
    • Became unable (because of a change in employment status) to pay basic living expenses for the household

Periods of nonqualified use after Dec. 31, 2008, will also reduce the amount you can exclude.

Can exclude one sale every two years

You’re only allowed to exclude gain on the sale of a home once every two years. This is true unless the reduced gain exclusion rules apply. You usually can’t exclude the gain on the sale of a home if both of these apply:

  • You sold another home at a gain within the past two years.
  • You excluded all or part of that gain during the two-year period ending on the date of the sale.

If you can’t exclude the gain, include the entire amount in your taxable income.

Business or rental use

If you meet the ownership and use tests, you might be able to exclude gain from the sale of a home you rented or used for business. You might use part of your home to conduct business (such as using a home office). If so, you don’t need to allocate the gain to the business portion of the home.

However, you’ll still need to account for allowed and allowable depreciation you’ve claimed since May 6, 1997. You can’t exclude the gain that’s equal to depreciation deductions you claimed for periods after May 6, 1997. This applies if you claimed depreciation deductions for:

  • Renting out your home
  • Using your home for business

The property might be rental property at the time of the sale. If so, you’ll report the sale on Form 4797: Sales of Business Property.

Residence is part personal residence, part business / rental

You might use part of your property as a home and part of it for business or to produce income.

Example:

  • Apartment building where you live in one unit and rent out the other units
  • Store building with upstairs apartment where you live

If you sell the entire property, the IRS considers this a sale of two properties. Report the business portion on Form 4797. Report any taxable personal portion on Form 8949. You can exclude the gain only on the portion used as a home.

Allocate these items between the personal portion and the business portion of the sale:

  • Sales price
  • Sale expenses
  • Adjusted basis of property you sold

Attach a statement to your return showing:

  • Total selling price of the property
  • Method you used to allocate the amounts between the business and personal portions

However, you can’t exclude the part of the gain equal to any depreciation allowed or allowable after May 6, 1997.

Non-qualified use modification of the home sale exclusion

For sales after Dec. 31, 2008, different rules might apply for figuring the excludable gain.

Under these rules, you might not be able to exclude gain on the sale of a main home that qualifies for the exclusion. This applies if that gain is allocated to a period of nonqualified use. A period of nonqualified use is any period when one of these people don’t use the home as a main home:

  • You
  • Your spouse
  • Your former spouse

However, a period of nonqualified use doesn’t include:

  • Any period before Jan. 1, 2009
  • Any period in the five-year period after the last period when you or your spouse used the home as your main home
  • A period of temporary absence for up to two years for one of these reasons:
    • Health
    • Change in employment
    • Certain unforeseen circumstances
  • Any period when you or your spouse served on qualified official extended duty. This can suspend the five-year ownership and use tests for a period of up to 10 years.

To learn more, see Publication 523: Selling Your Home at www.irs.gov.

Where to Go For Tax Help With Tax on Property Sale

You don’t have to navigate your taxes solo… H&R Block can help! If you’re in the position of selling your home, and don’t know how to report it on your taxes, we have your back. With many ways to file your taxes, you can file this year with confidence when reporting a tax on property sales.

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