Important 2015 Update: Make $500,000 Tax Free by Selling Your Home

An Update to the August 20th, 2013 Blog Post

What is the best income tax shelter that the average person can have? The answer: homeownership. Doesn't this sound incredible? But if your home has gone up in value, the first $500,000 in profit, per married couple, is income tax free. If you are single, the first $250,000 is income tax free.

Since the purchase price or improvements made are not part of the profit, most people will not pay any income tax on the sale of their home. The good news is that you can take advantage of this tax free perk every two years. Check with your tax professional to see how this can work for you.

There are several points that the IRS requires you to meet to exclude the gain from the sale of your home. These include the following:

  1. Two years of ownership: You must have owned your home that you are selling for a minimum of 2 years during the 5 years prior to its sale.
  2. Principal residence: You must have used the home as your principal residence for at least two of the five years prior to sale.
  3. No sale of another home: You must not have sold another home and excluded the gain on that sale within two years of this sale.
  4. File a joint tax return with your spouse: You must file a joint return income tax return if you were married.

  1. Ownership: You or your spouse must have owned the house being sold for the time set forth above.
  2.  Residence: You and your spouse must have lived in the house for that time. If you were not married and claim the $250,000 exclusion, you must have lived in the house for that time.

Additionally, if you sell your home and can qualify for the full two years, you can prorate the exemption and still receive part of it.

You can use this 2-out-of-5 year rule to exclude profit each time you sell your principal home. Ordinarily, you can claim to exclude the profit only once every two years. Some exceptions, however, do apply.

2-Out-of-5 Year Rule Exceptions

If you lived in your home less than 24 months, you may be able to exclude a part of the gain. Exceptions are allowed if you sold your house because the location of your job changed, because of health concerns, or for some other unforeseen circumstances.

Your job has required a new residence: If you lived in your house for less than two years, you can exclude a part of your gain on the sale of your house if your work location has changed. This applies if you started a new job, or if you must move to a new location with your employer.

You have serious health problems: You will need to carefully document your health difficulties and be able to prove to the IRS that they existed at the time you make the claim of exemption. A note from your doctor may not simply be enough.

If you must sell your residence due to unforeseen circumstances: IRS Publication 523 defines an unforeseen circumstance as "the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home." The IRS has given specific examples of unforeseen circumstances and include the following:

  • Natural disasters;
  • Acts of war;
  • Acts of terrorism;
  • Change in employment or unemployment that left you unable to meet basic living expenses;
  • Death;
  • Divorce;
  • Separation; or
  • Multiple births from the same pregnancy.

And who says the IRS does not have a heart? Check with your tax professional to see how this can work for you. Contact an experienced Illinois family law attorney at the Law Office of Martoccio & Martoccio at 630-920-8855 if you are in need of legal advice in DuPage, Cook. Will, Kendall or  Kane County, Illinois.

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