There is a way around capital gains taxes, and it’s through home sales exclusion. Homeowners everywhere know about the tax breaks the US government is serving up, especially the ones on tax deductions and mortgage interest. Home sellers stand to benefit big time. Majority of them will not owe the IRS a cent. Selling your main residence can earn you profits amounting to as much as $250,000. That’s as a single owner. You can make two times that amount if married. All these come with no capital gains taxes owed. In the past people escaped having to pay taxes on profits made from home sales one way: using the same money to purchase other, pricier homes within a couple of years. Sellers age 55 and older had another option. They could opt for a one-time tax exemption offer in profits worth nearly $125,000.
The passing of the 1997 Taxpayer Relief Act eased the home sale tax load borne by the millions of homeowner taxpayers. Per-sale exclusion amounts seen today, replaced the once-in-a-lifetime or rollover alternatives. So who is qualified? This is determined through the “USE” checklist or test. Exemptions restricted to every couple of years. People are only exempted from home sale capital gains taxes once per two-year period. USE Test – You’re qualified for home sale capital gains tax exemption if you owned and inhabited a residential place for two of the last five years prior to selling, but there can be interruptions in the timeframe involved. You can reside in the house during year 1 and rent it out for the next three years, move back in for year 5 and still be eligible. Failing the USE Test – If you flunked the USE test, there’s still hope. You can avail of prorated exclusions on capital gains, provided your home was sold because you switched jobs, had health reasons or other unexpected circumstances. Say you lived in a house for just one year because of employment changes. This entitles you to an exemption of $125,000 or half the original $250,000 exemption you would’ve gotten.
If you’ve been toying with the idea of selling your house for months, but are a few months shy of the two-year requirement, hang in there just a bit more until you complete the entire 24 months. It will mean bigger capital gains for you.