Taxes on Your Home’s Sale: Do You Qualify for a Tax Exclusion?

If you’ve sold a primary residence in the last year, it’s important to be aware of how that sale impacts your tax return. In many cases, the profits from that sale can be excluded, which means you don’t need to report them as income. However, there are many factors that go into determining whether or not you qualify. This blog will outline the basic qualifications and their exceptions, but if you’ve sold a home in the last year, you should look for tax prep help in Provo to ensure you qualify.

Qualification Requirements

If you qualify for the tax exclusion, you can exclude up to $250,000 of profits on your home’s sale. That amount is increased to $500,000 for married couples filing jointly. Any profits over these amounts would be taxed as income. To qualify for this exclusion, you must meet all three of the following requirements:

  • Own the home for at least two years
  • Live in the home as a primary residence for two of the last five years
  • Have not taken the tax exclusion on another home sale in the last two years

Note that the residency requirement does not have to be two consecutive years, nor does it have to be the two years immediately preceding the sale of the home. For example, if you bought a home and lived in it for a year, then rented it out for two years, and lived in it again for another year, you would still qualify for the exclusion.

To qualify for the $500,000 exclusion when filing jointly, both spouses must meet the residency requirements, but only one spouse must meet the ownership requirement.

Exceptions to Requirements

The IRS allows certain exceptions to these requirements under special circumstances, such as divorce, or in the case of active-duty members of the armed forces, Foreign Service, or federal intelligence agencies. For the latter, the five-year-test period can be suspended up to ten years under the following circumstances:

  • If you’re stationed for more than 90 days at a location more than 50 miles from home, or
  • If you’re residing in government housing under orders

This is only one common exception to the requirements outlined above, so even if you don’t meet those requirements, speak to your accountant to see if you can still qualify for the exclusion.

Reduced Exclusions

The IRS also offer reduced exclusions in some situations. A reduced exclusion allows you to exclude a smaller portion of your home sale profits. Common reasons to receive a reduced exclusion are:

  • Change of employment
  • Change of health
  • Divorce
  • Other unforeseen circumstances

For example, if you purchased a home and lived in it for a year, then lost your home and were forced to sell your home and relocate, the IRS still allows you to take a reduced exclusion on the profits. Since you lived in the home for half the required time for the full exclusion, you could exclude half the normal amount—$125,000 if filing individually, or $250,000 filing jointly.

Claiming Your Exclusion

Claiming this tax exclusion is often as simple as not reporting the home’s sale on your tax return. However, qualifying for the exclusion is more complicated than it first appears; and calculating your actual profits on the home’s sale can be a rather intricate endeavor as well. So, if you’ve sold a home in the last year and are hoping to qualify for the exclusion, look for tax prep help in Provo from a qualified CPA at Biesinger & Kofford CPAs. We’ll be able to guide you through the process and ensure you’re getting the maximum benefit from the exclusion.