One of the most significant tax advantages to owning a home comes at the back end of ownership, when you decide to sell it for profit. A homeowner can exclude up to $250,00 of such profit from the federal capital gains tax. For married couples filing a joint return, the exclusion jumps up to $500,000.
This big tax break does come with some basic requirements. It applies to the sale only of a principal residence, not of a vacation home or investment property. With some limited exceptions for poor health, job changes, and as a primary residence for at least two of the five years preceding the sale of the home. But, the two years need not be an uninterrupted time span.
If the history of the home includes some business use, the owner cannot exclude that part of the gain that is equal to the depreciation claimed while the house was used as rental property. This scenario could arise when the owner rents out part of the house for a period of time but then moves back in, sells it, and otherwise qualifies for the exclusion related to that sale.
There is another two-year rule that comes into play after a taxpayer claims the home-sale exclusion. There is no limit to the number of times that the exclusion can be claimed for multiple sales, but as a rule, once the exclusion is claimed, the tax payer must wait two years before claiming another such exclusion.
For a married couple to qualify for the exclusion, it is sufficient if either spouse meets the ownership requirement. However, both spouses must beet the use requirement. Neither spouse is rendered ineligible for the exclusion because he or she had already excluded the gain on a different primary residence during the two years preceding the date of the current sale.
Actual resolution of legal issues depends upon many factors, including variations of facts and state laws. This post is not intended to provide legal advice on specific subjects, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel before taking action on matters covered by this post.