Sale of Residence – Can Gains Be Excluded?

An individual may qualify to exclude from their income in a particular year, all or part of any gain from the sale of their main home. A main home is defined as the one in which you live most of the time.

Ownership and Use Tests

For you to be able to claim this exclusion, you must meet the ownership and use tests for the home in question. This means that during the 5-year period ending on the date of the sale, you must have:

• Owned the home for at least two years (the ownership test)
• Lived in the home as your main home for at least two years (the use test)

Gain

If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income or $500,000 if a joint return was filled.

• If you can exclude all of the gain, you do not need to report the sale on your tax return
• If you have gain that cannot be excluded, it is fully taxable.

Loss

You cannot deduct a loss from the sale of your main home.

Reporting requirement

Only report the sale of your main home on your tax return if:

• There is a gain on the sale that cannot be excluded,
• You have a gain and choose not to exclude it, or
• There is a loss on the sale and you received a Form 1099-S.

More Than One Home

Please note that if you have more than one home, you can exclude only the gain from the sale of your main home. You must pay tax on the gain from selling any other home. If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time.

Example A:

You own and live in a house in the city of Atlanta but you also own a beach front property in South Beach. This property is used for vacations during the summer months. The Atlanta house is your main home.

Example B:

You own a house, but you live in another house that you rent. The rented house is your main home.

Business Use or Rental of Home

Business use or rental properties also affords one the opportunity to exclude gains. You may be able to exclude the gain from the sale of a home that you have used for business or to produce rental income. But like residential sales, you must meet the ownership and use tests.

Example:

On May 30, 1997, Jack bought a house. He moved in on that date and lived in it until May 31, 1999, when he moved out of the house and put it up for rent. The house was rented from June 1, 1999, to March 31, 2001. Jack moved back into the house on April 1, 2001, and lived there until he sold it on January 31, 2003. During the 5-year period ending on the date of the sale (February 1, 1998 – January 31, 2003), Jack owned and lived in the house for more than 2 years as shown in the table below.

Jack can exclude gain up to $250,000. However, he cannot exclude the part of the gain equal to the depreciation he claimed for renting the house.

User | 1/10/2017