One Major Tax Law Every Homeowner Should Know About
Planning on selling your home? You may qualify for a deduction that every homeowner should know about.
The $250,000/$500,000 exclusion is an extremely valuable tax law for homeowners. So, how do you know if you qualify?
First, you must own and occupy your house for at least two years before you sell it. This can include condos, apartments, mobile homes, as well as stock-cooperative. If you do qualify, you’re able to take the $250,000/$500,000 exclusion as many times as you would like as long as you only use it once every two years.
You also don’t need to be living in the home at the time that you sell it. The two years of ownership test may occur any time in the five years before you choose to sell your residence. In short, you have the option to rent your residence for up to three years and still qualify for the exclusion upon the sale of the residence, as long as you keep detailed records and assuming you have occupied the residence for at least two of the preceding five years before the sale.
Also, the home must be your principal residence in order to qualify for the tax break. While short absences are permitted, you (and your spouse if you’re filing joint) must reside there primarily to claim the $500,000 exclusion. It is important to remember that you are only allotted one principal residence at a time, so if you do have multiple homes, whichever location you spend the most time at would be your principal residence.
There are a few more guidelines to follow if you want to meet the $500,000 exclusion for married couples:
- You must select ‘Married Filing Jointly’ on your tax return
- You or your spouse must pass the ownership test,
- You and your spouse must meet the use test, and
- Neither you, nor your spouse can exclude gain from the sale of another home during the exclusion period (ending on the date of sale).
Something to keep in mind: ownership of the home and use of the home do not have to happen at the same time. The main requirement is that you have at least two years of ownership and two years of use; this can happen within any time frame. For example, if you rented a home for two years, and then decided to purchase it, the time you spent living in the rented home counts towards the usage- even if you weren’t an owner.
On average, American homeowners move once every seven years. This makes the exclusion extremely beneficial for those who are aware of it, as they can avoid income taxes on the profits of their home.
If you still have questions about tax exclusions and home buying/selling, get in touch with Paragon Accountants right away. Every homeowner (and potential homeowner) should know about this generous tax break!