You’re probably familiar with the current version of the tax break known as the home sale exclusion. If you’re single, you can exclude up to $250,000 of gain on the sale of your home. The exclusion can be as much as $500,000 when you’re married filing jointly. In either case, the general requirement is that you have owned and used the home as your principal residence for at least two of the previous five years. Typically, the exclusion is unavailable if you claimed it on your tax return within the last two years.
What happens if you sell the home without meeting the two-of-five-year requirement, or if you elected the exclusion within the last two years? In some cases, you still may be eligible for a partial exclusion. To qualify for this modified tax break, the home sale must have resulted from a change in employment, the need for medical care, or other “unforeseen circumstances.”
What are unforeseen circumstances? Examples include death, divorce, loss of a job or a substantial pay cut, multiple births from the same pregnancy, the taking of property, and damage from a disaster.
What if none of the examples apply? You may not be able to claim any exclusion – or the IRS may examine the facts and circumstances of your case, and grant a partial exclusion. That could happen when factors beyond your control forced you to sell the home before you could have reasonably anticipated that you would in the normal course of events.
A partial exclusion is based on the time of use and ownership as a principal residence. For example, if you lived in the home for one year, the maximum is $125,000 when you’re single, and $250,000 when you’re married filing jointly.
No matter the reason you’re selling your home, contact us to learn how the rules can affect your tax return.