Principal
residence exclusion
One of the best tax breaks for most people is the so called
"principal residence exclusion." If you qualify, you can deduct
up to $250,000 from the sale of your primary or principal residence.
To
see why this is a great tax break, consider the following example.
Suppose you bought your home twenty years ago for $50,000, made
no improvements to it, and sold it this year for $300,000. You
would have a gain of $250,000, the difference between what you
sold it for ($300,000) and what you paid for it ($50,000). However,
because of the principal residence exclusion, your taxable gain
would be zero - meaning you would owe no tax. If the property
did not qualify as your principal residence, the gain would
be taxable.
If
you are married and file a joint tax return, it's even better.
You can deduct up to $500,000.
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How
long must I live in the home to qualify?
You
must have owned the home and used it as your primary residence
for at least two out of the last five years. These dates are
measured as of the date the home is sold.
For
example, if you bought your home at least two years ago and
have lived in it since that time, you qualify. If you bought
it six years ago and lived in it for four years and then moved
out, you would still qualify, because you had been in the house
for more than two years out of the last five.
These
are the basic rules, but there some exceptions - such as a forced
second sale (required by your job) in less than two years or
time spent in a nursing home. If you have one of these situations,
you may want to discuss it with a tax expert.
How
often can I claim this exclusion?
This
is not a one-time exclusion. You can use it again and again
- so long as you wait at least two years between sales. If you
bought a home on January 1, 1997, and sold it on February 1,
1999, the sale would qualify. If you then bought another home
on June 1, 1999 and sold it on July 1, 2001, that sale would
qualify too. If you need more information on tax breaks, consult
with a tax attorney in your area.
