There comes a point in time or age or you want to move along that you have to sell your home, whether it’s because you’re downsizing, upsizing or retiring.

With mortgage rates falling, more and more people are looking to purchase a new home. This is great, but unless you plan on continuing to use your old home, it needs to be sold. Today I want to talk about how taxes work when it comes to the sale of your principal residence.

If I remember right, you can exclude some of the “gain.” Correct?

Correct. A lot of people think that the old rules are still in place. The old rules said that if you sold your home, you had to use those proceeds from the sale of that home and buy another home within two years or you’d have to pay a gain. That’s changed now. Now you actually get an exemption as long as you “check all the boxes.”

The IRS says if you’re single, you can exclude up to $250,000 worth of gain on the sale of your home, and if you’re married, $500,000—as long as you’ve owned your home for two of the last five years and occupied your home for two of the last five years.

If you do not meet those requirements, can you get a partial exclusion, like a discount?

In general, it’s all or nothing—you either qualify for it or not—but they did list some exceptions. Those exceptions are work-related items like you moved and you have to sell your house because you’re moving because of work, health-related items or unforeseen events, such as your home was destroyed by fire or tornado, you had a death in the family, divorce, having twins and now the house is too small for you or you lost your job … those kind of things fit into that exception.

Is it really that simple?

It’s really not. There are a lot of facts and circumstances that can determine whether you’re eligible to take that exclusion.

What do we need to be aware of if we’re going to sell the home—and the gains and all the tax liability?

For most people it’s going to be pretty straightforward. You’re going to have lived in it for two of the last five years and occupied it. But there are certain situations where you might not.

For example, you could have received the home as a gift from your parents and you have not been meeting those requirements of owning and living in the house for two of the last five years. There are a lot of estate planning reasons to do it, but there are also things that you should be aware of from when it’s actually sold, so you really have to be careful about that.

A second example is if you may have used your home as part of a business. There may be some reasons why the exclusion doesn’t work fully in that case, either. In that situation, there are things you can do to work around that, so you should talk to your accountant when it comes to that point.

Is there still no tax if I took depreciation in a prior year?

It’s a little bit different than that. You will still need to recapture any depreciation taken. If you take, for example, $5,000 of depreciation on your business because of your home, you have to essentially pay that back when you sell your home.

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Jeff Dvorachek
I joined Hawkins Ash CPAs in 1998. I am the partner-in-charge of the Manitowoc, WI, office and tax director for the firm. I have thorough experience providing tax services to individuals, commercial businesses, nonprofit entities and estates and trusts. I also provide compilation and review services. I lead the Tax Committee and am a member of the Information Technology Advisory Committee.

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