You sold your house, congratulations! Depending on your situation, you may be eligible to exclude some or all of the profit from the sale from your taxable income. This is called the principal residence exclusion.
What is the principal residence exclusion?
When you sell your house and make a profit, the profit is considered a capital gain. If you meet the eligibility requirements, you may qualify to exclude up to $250,000, if filing individually, or up to $500,000 if filing jointly, of the gain from the sale of your home from your taxable income.
How do I know if I qualify for the principal residence exclusion?
To qualify for the exclusion of gain on the sale of your home, the IRS has a number of eligibility requirements that must be met.
Principal Residence Ownership
To qualify for the exclusion, the home sold must be classified as your main home or personal residence. If you only own or live in one home, then that is your main home. If you own more than one house, your main home is usually the one in which you spend the most time. Other relevant factors are listed below:
- The address is listed on your U.S. Postal Service address, Voter Registration Card, federal and state tax returns, and driver’s license or car registration
- The home is near where you work, where you bank, the residence of one or more family members, and recreational clubs or religious organizations of which you are a member
- You must have owned the home for at least two out of the five years prior to the date of sale.
Similar to the ownership requirement, you must have used the home as your primary place of residence for at least two out of the five years prior to the date of sale. These years do not have to be continuous to qualify. It is worth noting two important points:
- Vacations and other short absences count as time you lived in the home
- Use of residence for one year followed by time living in a care facility counts for the residency requirement in cases of physical or mental inability to care for oneself
You can qualify for this exclusion every two years. This does not include selling a home and not taking an exclusion of gain on it. Meaning, if you did not claim an exclusion of gain on a home sale within the last two years, you’re still eligible to claim the exclusion of gain on your current home sale.
When is the date of sale?
The date of sale is either the date the title of the house transferred or the date the economic ownership shifted to the buyer, whichever comes first. Typically, these dates are the same. If you received a 1099-S, the date of sale also appears in box 1.
What kind of homes does the principal residence exclusion apply to?
The exclusion of gain can apply to any home that is your main home. The IRS lists the following as houses that qualify:
- Single-family home
- Cooperative apartment
- Mobile home
I qualify for the exclusion of gain. Do I still have to report the sale on my income taxes?
If you qualify for the exclusion of gain and receive an informational income reporting document like a Form 1099-S, you must report the sale of your home when filing your income taxes. Additionally, if you cannot exclude all of the gain from your income, you must report it.
What disqualifies me from excluding the gain?
There are a number of situations that are disqualified from this gain exclusion. It is important to think about whether the sale of your home involved a capital gain. Here are a few situations in which the exclusion would not apply:
- A loss on the sale of a house
- The transfer of a home to a spouse or ex-spouse
- Acquiring a property through a like-kind exchange
- If you are subject to expatriate tax
Corrigan Krause can help
The Corrigan Krause Tax team is here to help. Feel free to reach out to your tax team or email email@example.com with any questions you may have.