Tax Exclusion for Sale of Residence May Offer Substantial Value to Homeowners

As the economy continues to recover from the recent major recession, home sales in many areas have begun to upswing, and many homeowners who previously had remained on the sidelines of the market are now looking to sell their properties. The federal tax code offers the homeowners an important tax exclusion for the sale of a residential property, provided that they and the home qualify. If they do, the benefit of the exclusion can be sizable.

In the past (before 1997), homeowners only received a tax break on the profits they earned from selling their home by purchasing another, more expensive home within 24 months of the sale. Under the current rules, however, no such purchase requirement applies. The home seller may use his or her profits in any method he or she wishes. Another advantage of the new rules is that you may claim the exclusion multiple times. Each time you sell your primary residence for a profit, you may claim the exclusion, as long as you otherwise qualify for it, so long as it has been at least two years since you last claimed the exemption.

To qualify, the property must be, or must recently have been, your primary residence. Specifically, Section 121 of code requires that you owned and lived in the property as your primary residence for at least the immediately previous five years. This rule will eliminate some unfortunate homeowners from eligibility. For example, say you had to move for your job in 2009 and, due to the recession found yourself unable to sell. You have been renting the property for the last four years, but are now seeking to sell. If you sell the property for a profit, you are ineligible because you resided in the property for only one of the last five years. Primary residence also means that you must have lived there a majority of the time. If you sell your “winter home” that you occupied every year from Thanksgiving to the end of April, you must still pay gains taxes on those profits, because that was not your primary residence.

Additionally, the exclusion places a cap on the dollar amount you may claim. A single taxpayer can only exclude $250,000 of profit on the sale of the home. A married couple may exclude as much as $500,000, provided that each of them meets the ownership and residency requirements, and neither claimed the exemption within the previous two years.

Improving economic conditions have many ripple effects, including an increase in the buying and selling of homes. This transaction can involve substantial profits and have significant tax ramifications. To ensure that you get all the tax breaks you deserve in connection with the sale of your home, consult the tax attorneys at Samuel C. Berger, P.C. and CPAs at S.C. Berger, P.C. Our CPAs and attorneys can help you ensure that you maximize your exclusions on your tax return.

Reach us online or call (201) 587-1500 or (212) 380-8117 to schedule your free, confidential initial consultation today.

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