Cashing Out: Exclude up to $500,000 in Home Sale Gains
Filing Guide
Use Schedule D to report taxable home sale gains.
IRS Publication 523:
Selling Your Home
Tax Savers
You can use the exclusion to save tax when you sell vacation or rental property. You do so by moving into the property yourself and occupying it as your primary residence. You’ll have to treat any depreciation you’ve taken as “unrecaptured Section 1250 gain” when you convert rental property to residential use. No further tax is due unless your final gain exceeds your $250,000 or $500,000 exclusion.
Tax Savers
If your spouse dies while you own your home jointly, their basis is “stepped up” to half of the home’s fair market value on the date of their death (100% in community property states). Since you can file jointly for two years following their death, you can exclude up to $500,000, on top of the new basis, during that two-year period.
Tax Savers
If you’re forced to sell your home at a loss, and you own your own business taxed as a partnership or corporation, consider selling the home first to the business, then to the ultimate buyer. This lets the corporation deduct closing costs to salvage at least some deduction for your loss.
Land Mines
If you sell your home to your spouse as part of your divorce, those payments don’t increase the buyer’s basis. If your ultimate goal is to sell the home, your best bet may be to sell to a third-party before the divorce to claim the full $500,000 exclusion.5
Sources
1IRC §121(a).
2IRC
§121(b)(2).
3Regs. §1.121-3(b).
4IRC §1250.
5IRC
§1041.
The Taxpayer Relief Act of 1997 made important changes when you sell your primary residence. The old law, effective for sales before May 5, 1997, let you roll unlimited gains into a new home and offered a one-time $125,000 exclusion if you sold your home after age 55. The new law lets you exclude up to $250,000 of gain ($500,000 for joint filers) every two years, with no need to roll your gains into a new home.
You can exclude up to $250,000 selling your home if:
- You own it for two of the last five years,
- You occupy it as your primary residence for two of the last five years, and
- You haven’t used the exclusion within the last two years.1
You and your spouse can exclude up to $500,000 if:
- Either of you own it for two of the last five years
- Both of you use it as your primary residence for two of the last five years, and
- Neither of you has used the exclusion within the last two years.2
You can exclude a partial share of your gain (calculated by dividing the number of months you qualify by 24) without meeting the two-year minimum, if your move is due to:
- Change in employment (you, your spouse, a co-owner of the house, or any other person whose principal abode is in the home accepts a job whose location is at least 50 miles farther from the home than their previous place of employment);
- Health (a qualifying person or their relative moves to treat a disease, illness, or injury or to obtain or provide medical care for a qualified individual); or
- “Unforeseen circumstances” (including, but not limited to, involuntary conversion, natural or man-made disaster, or a qualifying individual’s death, unemployment, change in employment or self-employment status, divorce, or multiple births from the same pregnancy).3
If your gain is more than your tax-free exclusion, report the excess as short-term or long-term gain on Schedule D. If you’ve taken any depreciation on the property, you’ll have to treat it as “unrecaptured Section 1250 gain.” This essentially means reporting it as income and paying tax on it, but capped at 25%.4 A final point—there’s no deduction allowed for selling your home at a loss.
| Prepared using the templates at Tax Coach Software |