Selling Your Personal Residence: Full and Partial Home Sale Exclusions

Before you sell your home, it’s important to understand the tax implications. There’s a good chance that the profit from your home sale will not be taxable. Unmarried individuals can exclude up to $250,000 in profits from capital gains tax when they sell their primary personal residences, thanks to a home sales exclusion provided for by the Internal Revenue Code. Married taxpayers can exclude up to $500,000 in gains. The tax break is the Section 121 Exclusion, which is commonly referred to as the home sale exclusion.

To calculate your gain, subtract your cost basis from your sales price. Find your cost basis by starting with what you paid for the home, then add the costs you incurred in the purchase, such as title fees, escrow fees and real estate agent commissions. Add the costs of any major improvements you made, such as replacing the roof or the furnace. Minor renovations such as painting a room don’t count.

Subtract any accumulated depreciation you may have taken over the years — if you’ve ever taken a home office deduction, that would factor into the depreciation. The resulting number is your cost basis.

Your capital gain is the sales price of your home minus your cost basis. You’ve got a loss if the number is negative. You can’t claim a deduction for a loss from the sale of your main home or for any other personal property. You’ve made a profit if the capital gain is positive. If the property is your primary residence, you can subtract the home sales exclusion to find your taxable gain.

To be eligible for that break, you must have lived in the home for a minimum of two of the five years immediately preceding the date of sale. The two years don’t have to be consecutive, and you don’t have to live there on the date of the sale.

However, you can claim the exclusion only once every two years because you must spend at least that much time in the residence. You can’t have excluded the gain on another home in the last two-year period.

Despite the restrictions, a partial exclusion may be available if you sell the home without meeting the two-out-of-five year rule or if you have claimed the exclusion within the last two years. But the tax break is allowed only if the home is sold due to a change in employment, a need for medical care or other unforeseen circumstances. The IRS defines an unforeseen circumstance as an event that you couldn’t reasonably have anticipated before buying and occupying your main home. Natural disasters, a change in employment that left you unable to meet basic living expenses, death, divorce and multiple births from the same pregnancy qualify as unforeseen circumstances under IRS rules.

If none of these exceptions apply, the IRS will examine the facts and circumstances of the case. The most important factors are whether the home has become less suitable as a principal residence, if your ability to pay for the home has materially decreased and if the reason for the sale could have been reasonably anticipated when you acquired the place.

The amount of the partial exclusion is equal to the available exclusion amount (a maximum of $250,000 or $500,000, depending on your filing status) multiplied by the percentage of time for which you qualified.

• As an example, if you and your spouse have owned and used a home as your principal residence for twelve months.
  • Due to unforeseen circumstances, you’re forced to move, so you sell the home at a $150,000 gain.
  • Unfortunately, you don’t qualify for the full exclusion, but you can still salvage a partial exclusion.
  • The appropriate percentage is 50% (12 months divided by 24 months). When you multiply $150,000 by 50%, you arrive at $75,000. Therefore, you can exclude $75,000 of gain from tax and the remaining $75,000 is taxed as a capital gain.

For any questions regarding this topic please reach out to your LMC professional.

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