Real estate values have risen significantly, and it has created increased desire to sell property. Many clients have sought to capitalize on the appreciated value of their homes, and they ask about the tax implications of the capital gains they recognize upon sale of their primary residence. Here is helpful information on the home sale exclusion of IRC Section 121.
Principal residence exclusion. Taxpayers may qualify to exclude from income all or part of the capital gain from the sale of their home (“principal residence exclusion”). To qualify for this exclusion, the taxpayer must meet ownership and use tests:
1. Ownership test. The homeowner must have owned the home for at least
two years of the five-year period ending on the date of the sale.
2. Use test. The homeowner must have used the home as their main residence
for at least two years of the five-year period ending on the date of the sale.
Limits on the exclusion. The principal residence exclusion is limited to $250,000 ($500,000 for joint filers). Also, taxpayers may only claim the exclusion once during a two-year period.
Note: In certain circumstances, taxpayers who fail the two-out-of-five-year ownership and use tests may still be eligible to claim a partial primary residence exclusion if their main reason for the home sale was a change in workplace location, a health issue, or another unforeseeable event.
If you are contemplating the sale of your home and want help determining your eligibility for the home sale exclusion, please contact us.