Homes for Sale & Taxes - What a Seller Needs to Know

by : John Harris

In May of 1997, the tax code governing profit from the sale of a personal residence was changed. In the past, any gain from a home for sale could be taxed, unless rolled over into the purchase of a new home.

The new Internal Revenue Service rules are more advantageous to sellers of homes for sale. You can no longer roll a gain into the new home; however, not all gain is taxable as in the past.

Now, homes for sale have the first $250,000 of profit exempt from any taxes, if you are the owner and filing single status. If you file jointly with your spouse, your homes for sale gain is tax exempt up to $500,000 - this is a half-million dollars, tax-free profit. This means that if you purchased a home for $200,000, you could sell it for $450,000 as a single or $700,000 as a couple and incur no taxes on the profit.

There is, however, a time and resident test that must be met in order to receive this tax exemption for your homes for sale profit. You must have lived in the home for two out of the past five years in order to qualify for the tax exemption.

What If You Don't Meet the Time & Resident Test

So, does that mean that if you do not meet the time and resident test you then owe taxes on all of the gain? Not necessarily.

The tax code allows for several specific exemptions to the time and resident test, when you must move due to certain qualifying events. Here are a few of those events:

Ã?â‚??You must move due to the health of one of the residents in the home (your immediate family) or the health of a relative who is in your care.

Ã?â‚??A death in your immediate family that incurs the move, such as a breadwinner dies and the spouse cannot afford to keep the home.

Ã?â‚??Divorce that forces a move.

Ã?â‚??The unemployment of a breadwinner (must be qualified for and receiving unemployment compensation) and cannot afford to keep the home.

Ã?â‚??A new job that is 50 miles further away from the home than the current job. Otherwise, if you drove 20 miles to your current job, then the new job must be at least 70 miles from the home to qualify for an exemption.

Ã?â‚??Your home was damaged from a natural or manmade disaster, and you were forced to sell it.

Ã?â‚??Perhaps an act of war or terrorism has caused the move.

Ã?â‚??Even the birth of twins, triplets and so on, made the current home for sale too small and impractical to keep.

IRS publication 523, 'Selling Your Home', covers many other unforeseen events that would qualify you for an exemption.

When you do not meet the time and resident test but qualify under one of the unforeseen event exemptions, you receive only a partial exemption for the gain on your home for sale. You will be taxed on a pro-rated amount of the gain, based upon how long you actually resided in the home.

If you lived there less than a year, then the profit from your home for sale is considered to be a short-term gain. This means, on the pro-rated amount you owe taxes, you will pay the same tax rate as you do on your 1040 income tax form.

If you have lived more than one year but less than two in your home for sale, the profit is considered to be a long-term gain. Rather than paying the generally higher income tax rate, most people are taxed at 15 percent. So, if you have lived in the home for less than one year, it is to your advantage to remain there until you pass the one-year time mark - if at all possible.

The changes in the tax code for profit on homes for sale is much easier now to calculate and typically are more advantageous to the seller now, than in the past. Of course before making any home selling decisions or plans, consult a Certified Public Accountant or other tax professional.