Selling Your Home

It used to be that if you sold your home you had two choices:  reinvest the capital gains immediately into a new home, or pay capital gains taxes on the profit. 

Not so anymore!  The law now states that you may be able to exclude up to $250,000 of capital gain from the sale of your home if you’re single (up to $500,000 if you’re married filing jointly) each time you sell your home.  That’s right!  EACH TIME YOU SELL YOUR HOME.  There are a few provisions, though: 

1. You must have owned the home for at least two of the five years  preceding the date of the sale. (Example:  If you sold your home on December 31, 2008, you had to have OWNED the home no later than December 31, 2006.)
2. You must have lived in the home as your MAIN RESIDENCE for two of the past five years.  So, if you bought the home in 2003 and rented it for a period of time, you must have lived in that home, as your primary residence, for two years.
1. The housing bill that was signed into law on July 31, 2008, requires that you INCLUDE in income the capital gains for the amount of time the property was not your main residence, beginning in January, 2009.  In the example above, nothing would change and all capital gains, up to the allowable amount, could be excluded.  If, however, you owned your home from 2000 through 2010, and did not use it as your main residence for all of 2009 and 2010, you would need to include in income 20% of the capital gain, and report it on Schedule D. 

If you don’t meet the ownership and use tests, the IRS might still allow you to exclude a reduced maximum amount of the gain realized on the sale of your home.  Qualifying circumstances include: 

1. Sale of your home due to health reasons
2. Sale of your home due to a change in place of employment
3. Certain unforeseen circumstances
1. Divorce or legal separation
2. Natural or man-made disasters resulting in a casualty to you or your home
3. Involuntary conversion of your home. 

Now, suppose you saw a greater capital gain than the allowed exclusion?  You’d have to claim as income all gain above the allowed exclusion on Schedule D (Capital Gains and Losses). 

Below are some FAQs regarding the sale of your home: 

My grandmother left me her home in her will.  I just sold it.  Do I qualify for the exclusion, or is this taxable income? 

This is considered the sale of an inherited property, not the sale of your home.  To determine if the sale is taxable, you’ll need to determine your basis in the property.  To do this, you’ll need to determine the following: 

1. The fair market value of the property on the date of your grandmother’s death.
2. If the executor of the estate chooses to use alternate valuation, you must determine the fair market value of the property on the alternate valuation date. 

The difference between the actual selling price and the fair market value will determine your capital gain or loss. 

What form do I use to report the sale of my home? 

Report the sale of your home on Schedule D. 

If I take the exclusion for the sale of my home this year, will I be able to exclude any future sale of my new home? 

There is no limit on the number of times you can exclude the gain on the sale of your principal residence, with the exception of the two-year waiting period and as long as you meet the ownership and use tests. 

I sold my vacation home this year.  Can I exclude the capital gain? 

No.  Your second home is considered a capital asset and does not qualify for the exclusion.  You will need to report the sale on Form 1040, Schedule D. 

I sold my home, but suffered a loss instead of a gain.  Is the loss deductible? 

No, the loss on the sale of a personal residence is a nondeductible personal loss. 

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