Excluding Gain Limits
You may qualify for excluding gain from the sale of your home by up to $250k of your capital gains from your taxable income or $500k if you’re filing a joint tax return with your spouse. You must sell your principal residence before you can claim the exclusion. You can exclude gain up to $500k of each home’s capital gain if you own two houses. Publication 523, “Selling Your Home,” provides cost basis rules and worksheets. Topic No. 409, “General Capital Gain and Loss Information,” covers general capital gain and losses information.
Requirements for the Gain Exclusion
To meet the requirements for Section 121 Gain Exclusion, you must satisfy both of the following tests:
1) you must own and use your principal residence as your main home for at least two out of the five years before the date of sale, and 2) you must exclude any gain from the sale of your other home during the two years preceding the sale of your principal residence. If you meet either test, you may exclude the gain from the sale from your capital gains tax liability calculation.
To determine whether you meet the ownership requirements, you need to identify the period when you met both tests. For example, if you meet the ownership test during the first three years of owning your home, then you meet the ownership test for the entire five-year period. Similarly, if you meet the use test during the last four years of owning your home before selling it, you meet it for five years.
Reporting the Sale
If you sell real estate, you may need to file a Schedule D (Form 1041) each year’s end. You should also file Form 8949 if you sold any property during the year. Suppose you received a Form 1099-S (Proceeds From Real Estate Transactions). In that case, you must report the sale even if the gain from selling the house is excludable. You must also report the sale if you can’t exclude the entire amount of capital gains from taxable income. To know whether you need to report the sale, see Publication 523.
Suspension of the Five-Year Test Period
An individual is eligible for the suspension of the five-year test if they meet either of the following two conditions:
1) They are on a qualified official extended leave of absence from their position for more than 90 consecutive days.
2) They serve in a capacity that requires them to be absent from their position due to unforeseen circumstances.
At a military base at least 50 miles away from your family or living in government housing. Suppose you live in a dormitory, barracks, or similar quarters while stationed overseas. In that case, you may not be considered a resident of your state or county of your principal residence. You must also meet all other requirements for residency. For example, suppose you’re living in a hotel or motel room. In that case, you might need to stay there for 30 days before qualifying for residency.
If you sell your house under a contract that provides that part of the selling price will be paid in installments, you must report the sale as an installment sale. You may exclude any gain realized on the sale, but not any loss. See Publication 537, Installments Sales, for more information.
Summary Section 121 Exclusion
- You must sell your primary residence within ten years of buying it.
- You can exclude up to $250K of the gain or $500K if you file a joint return with your spouse.
- You must use the proceeds of the sale to buy another property, such as an investment property.
- You can deduct up to $10K per year for the cost basis related to selling your house.
- You can claim a deduction for state and local sales taxes paid on the sale of your home.
- You can also claim a deduction for mortgage interest paid on the home’s sale.
- You cannot claim a deduction for moving costs.
- You can exclude up to $250,000 ($500,000 for married couples filing jointly) of taxable gain from the sale of your primary residence.
- The exclusion applies to any gain from the sale of a primary residence.
- You’re required to report the sale of your primary residence even if you can exclude some of the gains.
- The suspension applies to spouses who are also military members.
- The exclusion of gain under section 121(b)(3) continues to apply to installment sales regardless of whether the seller uses the installment method to defer the gain.