One of the most commonly-asked questions for those planning on selling a home involves tax considerations. The sad truth, however, is that there’s no simple answer to this very important question. Most tax implications use many specific details including the profits obtained, location of the property, your age and more. However, four basic areas impact sellers’ taxable income and liabilities. Below, we list important notes for sellers regarding tax implications.
The Rule of two-out-of-five and $250,000 Exclusion
Back in 1997, the United States Federal Government passed a new homeowner tax program that has provided many US taxpayers with an actual positive incentive to sell their properties without having to pay large capital gains taxes. Known as the 2-out-of-5 rule, it permits homeowners as much as $250,000 for exclusions in profit from the sale of a primary residence for individuals, or $500,000 for married couples. The basic requirement is that you must follow these important standards:
- Sellers must live in the home as a primary residence for at least two years (24-months)
- The two years do not need to be consecutive. However, you must prove that you resided in this property for a 24-month period. This is a nice incentive for people who own homes in multiple states.
- In the two year period of residence, it must have been completed in the past five years prior to selling the property. This is where the two-out-of-five rule gets its name. For example, if you sold a house in 2013, you must list it as your primary residence for 24 months from 2008-2013.
- This exemption can only be claimed once every two years. However, like most tax rules there are some exceptions which apply.
Some of the Exceptions to the two-out-of-five rule
As we stated above, some exceptions to this rule exist. These exceptions allow you to take advantage of this tax consideration and can include:
- If your primary job changes location. If you lived in a house for less than two years, it is possible to exclude your capital gain of up to $250,000 for individuals if you are forced to move due to relocation of the primary job.
- Health Issues. If you are forced to sell your home due to health concerns or medical reasons, you may also qualify for this exemption. However, you need to ensure you have proper documentation to prove to the IRS if asked to supply. This documentation does not need to be submitted with your annual Federal or State income taxes.
- Unforeseen Circumstances. The final exception includes a detailed list of specific ‘unforeseen circumstances’. These circumstances force you to sell your property earlier than the two year residence minimum. Some instances include a natural disaster, act of terrorism or war, divorce or separation, death or multiple births.
There are several smaller tax considerations that any home seller should consider including closing costs, paying taxes on interest for loans, moving expenses and other ancillary potential deductions. A great resource of information is to visit irs.gov to get detailed answers for any questions you might have on the tax considerations on the sale of your property.
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