How to Avoid Taxes when Selling your Home

The government has given all home owners a benefit that used to be reserved as a one time option for senior citizens. The family residence can be sold and most or all of the capital gains are excluded from federal income taxes. Sound too good to be true? Well, it is true. However, as in all things done by the government, there are some guidelines that must be met for the exclusion to work.

The government wants you to look backwards for five years.

This is the big test on whether you can exclude your capital gains from the sale of your house. You must have lived in the house two full years during the five years preceding the sale. The IRS is not really picky with this. The two years does not have to be continuous. You can move into a house live in it for six months or a year and move out. Wait a year or two and move back in. Live in it some more and even move out again. As long as all of the pieces during the previous five years add up to two years total, you qualify for the exemption.

You cannot have sold another house and claimed this exemption during the two years immediately prior to the sale.

If you happened to have owned multiple residences during the five years that the government looks back, you must be careful to stagger the sales to meet this rule. You can live in one house for two years and sell it. You then move into house number two for two years and sell it. You can exempt both houses because there is no overlap of residence. However, if you had problems selling home number one so that the sale date falls into the two years prior to the sale of home number two, you cannot take the full exemption for the second house.

If you fail to live in the house long enough for the full exemption, you must do the paperwork for a partial claim.

Once again, the IRS actually tries to make this a simple process. You must compute the percent of the two year requirement that you did meet. If you only lived in the house for six months, you can exclude 25 percent of the capital gains. At one year, you get a 50 percent exclusion and so on. This is nice benefit for those who needed to sell their residence but did not meet the requirements for a full exclusion.

There are limits to the amount that can be excluded.

Most people will not have to worry about the maximum exclusion. It is $250,000 for a single person and $500,000 for most couples who file a joint return. As long as your capital gain on the sale stays below these figures, you should be clear on taxes. There are some exceptions to the higher limit on those filing joint returns. It would be wise to either check with a tax professional or do your best to read up on the literature provided by the IRS. Publication 523 is the one recommended by the IRS.