While selling your home, if you miss out on some tax friendly moves, you may face a big tax hit. In order to reap the maximum tax benefits, you need to follow some simple strategies.
Let’s first understand the tax aspect when you sell your home. If you are an unmarried person, you can exclude a profit of up to $250,000 from your sale. And if you’re married, you can exclude up to $500,000 from your profit. In order to get this exclusion, you’ll need to pass two tests
- You must be the owner of the property for a minimum period of two years during last five years counted from the date of sale.
- You must have used the property as your principal residence for two years during these five years.
To get the exclusion of $500,000 at least one spouse should pass the test of ownership and both the spouses should pass the test of use. Also, the exclusion of $500,000 can be claimed only when none of the spouses have claimed similar exclusion (from another house) within the last two years of the date of present sale.
Here are some suggested strategies to make you eligible to claim this tax break:
1. Think of getting married while making the sale!
When you have a big property, and selling could fetch a profit above $250,000, you may consider about getting married. Suppose you are expecting a gain of $500,000, people filing jointly can claim the entire gain as exclusion. So an amount of $37,500 which is 15 per cent tax on this $250,000 can be saved. And remember, this is a permanent saving. There is only one condition – you and your spouse must use the home as a principal residence for the minimum period of two years before the date of sale. So if your spouse was living in the home before the marriage, you can count this period towards the requirement of two years.
2. Sell your home in time after the divorce
When you get divorced, it is possible that your ex-spouse may continue living in your former principal residence and you may be owning the entire or part of the property. After a period of three years, you will fail the test of residence and become ineligible to claim any exclusion from your capital gain. So you may be required to pay tax on the entire portion of your gain from the sale of the house.
To avoid this, you can take some action before finalizing the divorce. You can include in the divorce agreement a clause which grants you and your spouse permission to continue the use of the home as principal residence for a reasonable period. So you are able to claim the tax exclusion even when you might not have stayed in the home.
3. The tax break on sale of land next to your home
Many people think that the exclusion of capital gain is limited to sale of home. However, IRS has allowed you to claim the exclusion from the sale of land which is vacant and adjacent to your home. So if the sale of such land is made separately, without selling the home, you can still claim the tax exclusion. Please remember two things about sale of such land – the land must be adjacent to your home and it should be used as a part of principal residence. So if the land is used for rental purposes or for business purposes, the sale of it cannot qualify for exclusion. Also you must sell the land within a period of two years before or after you sell your home.
If you follow all these rules, you can claim exclusion to save all the profits from the sale of such land.