Be Tax Savvy When Selling Home

The IRS gives you the opportunity to sell your home and earn tax-free capital gains; but calculating your gain exclusion might be tricky.

Some homes are money pits and others are money trees. Increase the chances that your home will blossom into big money when you sell by knowing how to navigate the real estate capital gains tax exclusion.

Winning and taxes

If you sell your home at a profit, you may be able to exclude up to $250,000 of the gain ($500,000 if you're married, filing jointly) from your taxable income. To qualify, you must have lived in the home for at least two years during the five-year period that ends on the sale date. You can only take this exclusion once every two years.

If you don't meet these criteria, don't panic just yet. Chances are, that you'll qualify for part of the exclusion anyway.

Selling too soon

Even if you took the full gains exclusion last year, you still may qualify for a reduced exclusion this year. Eligibility for the reduced exclusion is determined by the reasons why you're selling your current home. Acceptable ones are:

• Employment changes. You qualify for the reduced exclusion if anyone who lives in your home full-time gets a new job that's more than 50 miles away from the old job.
• Health problems. The regulations pertaining to this topic are somewhat more complicated. Basically, you can qualify if you have to move to obtain healthcare for yourself or someone who lives in your home. The healthcare must be necessary in the treatment of a disease, illness, or injury. You might also qualify if a close relative has specialized healthcare needs.
• Other unforeseen circumstances. Qualified unforeseen circumstances include death, divorce, unemployment, multiple birth pregnancies, government seizure of the home, or destruction of the home due to man-made disasters, acts of war, or terrorism.

Calculating the reduced gain exclusion

As you'd expect, the IRS has a complicated formula that's used to determine the amount of gain you can exclude. You can use this formula if you took the full exclusion last year, or if you don't meet the two-year residence test. It works like this:

1. Jot down the aggregate time (in weeks) that you owned and lived in the home as your primary residence during the five years prior to the sale. If you took the gains exclusion last year, make a note of how much time passed (in weeks) between the sale date of the first home and that of the second.
2. Pick the smaller of the above two numbers and divide it by 104 (i.e., two years in weeks).
3. Multiply that answer by $250,000, or $500,000 if you're married and file jointly. The quotient is the amount of the gain that's not taxable.

If the calculated gain exclusion is more than the gain you actually earned, you're in luck-your home has bloomed tax-free profits!