Avoid Capital Gains Tax on the Sale of your Home
with the Primary Residence Exclusion!

You may qualify to exclude from your income ALL or
PART of any gain from the sale of your MAIN HOME.
Exclude up to $250,000, $500,000 if married, from taxes if you
meet the Primary Residence Exclusion requirements!




Maximum Exclusion
If you sell your main home, or primary residence, up to $250,000
may be excluded from your income.  The amount jumps up to
$500,000 for married couples that sell their primary residence. 

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Primary Residence Exclusion Requirements
To qualify you must meet the following requirements:

  1. You owned the residence for any two of the last five years.
  2. You occupied your residence for any two of the last five
    years.
  3. You haven't used the exclusion within the last two years.


If you are married you need to meet the following requirements:

  1. You are married and file a joint return for the year.
  2. Either you or your spouse have owned the residence for at
    least two out of the last five years.
  3. Both you and your spouse have used the home as your
    principal residence for two out of the last five years.
  4. Neither you nor your spouse have used the exclusion
    within the last two years.

Period of Ownership and Use
The required 2 years of ownership and use during the 5-year period
on the date of the sale do not have to be continuous.  You meet the
IRS tests if you can show that you owned and lived in the property as
your main home for either 24 full months or 730 days (365 x 2) during the
5-year period ending on the date of the sale.

Example 1 - Home owned and occupied for 3 years
Kim bought and moved into her main home in September 2008.  She
sold the home at a gain on October 12, 2011.  During the 5 year period
ending on the date of the sale (September 16, 2008 - October 12, 2011),
she owned and lived in the home for 3 years.  Kim meets the
ownership and use tests above.

Example 2 - Met ownership test but not use test
Carlos bought a home in 2006.  After living in it for 6 months, he moved
out.  He never lived in the home again and sold it at a gain on May 15, 2011.
He owned the home during the entire 5 year period ending on the date
of the sale (May 16, 2006 - May 15, 2011).  However, he did not live in it
for the required 2 years.  Carlos meets the ownership test but not the
use test.  He cannot exclude any part of his gain on the sale, unless he
qualified for a reduced maximum exclusion (explained later).

A loss on the sale of your principal residence is not deductible.  If
part of your principal residence was used for business in the year
of the sale, you will need to treat the sale as if two pieces of
property were sold.  A loss is deductible only on the business part.


NOTE: Some of the gain on a sale after 2008 might not be excludable,
even if the two-out-of-five year ownership and use tests are met, if
your use the residence after 2008 as a second home or rental property.

To learn about Primary Residence No Exclusion for
Nonqualified use, click here.


Multiple Homes
If you own more than one home, you can exclude the gain from the
sale of your main home ONLY.  You must include in income gain
from the sale of any other home.

Note that the two years in the requirements doesn't have to be
consecutive.

Example 1:

  • Year 1: Dan and Tanya Winton live in a small house.
  • Year 2: They purchase the home.
  • Year 3: They decide to move out and rent the house to
                   Jamal through year 5.

Dan and Tanya can claim the exclusion up to $500,000 because
they have owned the home two out of five years (years 2, 3, and 4)
and have used it as their personal residence for two out of the last
5 years (years 1 and 2).

Example 2:  Christine and Jerry were married a year ago.  Prior
to the marriage they both owned their own home.  After they got
married, they decided to live in Jerry's home.  Christine sold her
home and used the primary residence exclusion to shield herself
from taxes on the gain of the sale of her house.  Now, Christine and
Jerry have decided that they need a bigger house.  They decide to
sell Jerry's house.  The estimated gain on Jerry's house is
$430,000; they plan to use the married couples primary residence
exclusion of $500,000 to shield them from taxes on the gain. 

Christine and Jerry do not qualify for the full married couples
exclusion because Christine doesn't meet the ownership and use
tests above.  Jerry meets both tests and can file a separate tax
return and claim his exemption.  This would shield only $250,000
of the $430,000 gain.  The best options available to Jerry and
Christine are:

  1. Wait one more year so they both qualify and can use the
    married couple $500,000 exemption.
  2. Sell now using Jerry's $250,000 exemption and pay taxes
    on the other $180,000 of gain.


Exceptions to the Requirements
There are exceptions to the primary residence exclusion
requirements.  You can still claim an exclusion, but the maximum
amount of gain you can exclude will be reduced if either of the
following is true:

  1. Change in employment - you may qualify for the
    exception if you change jobs.  The new place of
    employment must be at least 50 miles farther from your
    home than the former place of employment was.  This is
    known as the "50 mile safe harbor rule".

    Example 1:  If you live in California and take a job in New
    York, obviously, you will qualify for the exclusion.

    Example 2:  You currently live 10 miles from your job.  You
    take another job that is 45 miles away and decide to
    purchase a new house to be close to that job.  You are not
    eligible for the exclusion because your new place of
    employment is only 35 miles farther from your house to your
    former place of employment.

    You may still qualify for the exception via the "facts and
    circumstances" test.  For example, if you have a job that
    requires you to work unscheduled hours in which you have
    to arrive at work quickly, you may qualify for the exclusion.
     
  2. Health problem - you can qualify for the exception if the
    sale of your main home is to obtain, provide, or facilitate the
    diagnosis, cure, mitigation, or treatment of disease, illness,
    or injury of a qualified individual.

    Qualified individuals include: parents, grandparents,
    stepparents, children, grandchildren, stepchildren, adopted
    children, brother, sister, stepbrother, stepsister, half brother,
    half sister, mother-in-law, father-in-law, uncle, aunt, nice,
    nephew.

    A "physician safe harbor" is established if a licensed
    physician recommends a change of residence for one or
    more of the above reasons.

    Example 1:  Kevin and Tressa purchase a house that they
    use as their personal residence.  1 year later they sell the
    house to move closer to Tressa's father, Darrell, who has a
    chronic disease and is unable to take care of himself.  Due
    to the "facts" and "circumstances" that the sale of their home
    was the health of a qualified individual, Kevin and Tressa
    are entitled to claim a reduced maximum exclusion.

    If the sale merely benefits your general health and well
    being, you do not qualify for the exclusion.

    Example 2:  Scott purchases a house in Concord.  Scott is
    completely healthy and disease free.  On a routine
    checkup, Scott's doctor informs him that he needs more
    exercise.  Scott decides to sell his house and move to
    Hawaii so that he can increase his level of exercise by
    playing golf and surfing year round.  Scott is not eligible for
    the exclusion because the sale of his primary residence is
    only beneficial to his "general health".
     
  3. Unforeseen Circumstances - The sale of your home is
    because of an event that you did not anticipate before
    purchasing and occupying your main home.
    To qualify you must meet one of the following:
     
    • An involuntary conversion of your home.  For
      example, the home was condemned.
    • The home was destroyed by a natural disaster
      (earthquake, fire, tornado) or man-made disaster
      (war, terrorism).
    • Death
    • Termination of employment making the individual
      eligible for unemployment compensation.
    • A change in employment or self-employment status
      that results in your inability to pay reasonable living
      expenses.  These include food, clothing, medical
      expenses, taxes, transportation, court ordered
      payments, and expenses reasonably necessary to
      produce income.
    • Divorce or legal separation under a decree of
      divorce.
    • Multiple births resulting from the same pregnancy,
      such as twins.

Primary Residence Exclusion Maximum Dollar Limitation
Now just because you meet one of the exemptions doesn't mean
you get to exclude the entire $250,000/$500,000 amount.  The
exclusion amount is reduced and this reduction is based on a
portion or fraction of the two years that you met the requirements.
The numerator is classified as either days or months.  The
denominator of the fraction is 730 days or 24 months.  This, of
course, depends on how the numerator is specified. 

Example:  Nathan is single and owns and occupies his principal
residence for 14 months.  He gets another job 100 miles away and
decides to relocate.  He sells his house and moves closer to his
new job, realizing a $65,000 gain on the sale of his home.  The full
amount is deductible because it is less than his reduced exclusion
amount of $145,833[(14/24) x $250,000].  The $145,833 is the
maximum amount he is eligible to exclude. 


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