Sale of Principal Residence

Sale of Principal Residence
The exclusion for gain on the sale of a principal residence provided for in the Taxpayer Relief Act of 1997 creates 100% tax-free home sale profits for the great majority of taxpayers who sell their homes.

This exclusion replaces the previous deferral-of-gain rule that required taxpayers to purchase a replacement home within certain time and price limits. It also replaces the once-in-a-lifetime exclusion of up to $125,000 of gain in a home sale for qualifying taxpayers age 55 and older.

The exclusion for home-sale profits Under current rules, a seller of any age, who has owned and used the home as a principal residence for at least two of the five years preceding the sale, may exclude from taxation up to $250,000 of profit, if single, and up to $500,000 if married filing jointly. Generally, the exclusion may be used only once every two years.

The law provides that married individuals may exclude up to $500,000 of profits if:
• Either spouse owned the home for at least two of the five years before the sale
• Both spouses used the home as the principal residence for at least two of the five years before the sale, and
• Neither spouse is ineligible for the exclusion because of the once-every-two-year rule, the other spouse may still claim the exclusion if he or she qualifies. However, the exclusion then cannot exceed $250,000.

If you can't meet the requirements
The law does contain some relief for those taxpayers who cannot meet the ownership and use rules or who have already excluded gain on a home sale within the two-year limit. If the failure to meet either rule is due to a job change, circumstances, a partial exclusion may be available. The partial exclusion is calculated based on the ratio of the two years that the requirements were met.