Understand these generous tax breaks on selling your home

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If you are a home owner, then you are qualified to get a good tax break on selling your home.  With the correct strategies you can lock a profit of up to $250,000 ($500,000 for married taxpayers filing jointly) tax free.  And what happens if you do not meet the two year criteria and sell your home prematurely?  What happens if you have already claimed exclusion benefit within the last two years on some other house and now you sell your present home? No worries, IRS has some solace for you.

The IRS is quite generous in allowing you a huge portion of profits to keep on sale of your home.  If you own a property and use it as your primary residence for at least two years out of five years ending on the date of sale, you are eligible to claim the tax break.  However, there are certain concessions allowed by IRS even if you don’t meet these criteria.

So if you sell your house after 18 months without waiting the mandatory period of two years, still IRS rules make it easy for you to qualify for the reduced exclusion break.

The reduced amount of exclusion is arrived at by doing the following math – calculate the total number of days/months you owned the home and utilized as principal residence during the period of five years on the date of sale.  Divide it by 24 months and multiply by the full exclusion eligibility amount of $250,000 (or $500,000) and that will give you the proportionate amount of exclusion you are eligible for.  Similarly if you are claiming the exclusion benefit within two years of selling another house and claiming a similar benefit, calculate the period between the same date and the date on which you sold the present home, multiply it with the full exclusion eligibility amount and divide it by 24 months.  You will get the proportionate amount of exclusion you are eligible.

Let us take some examples to explain this.  If you and your spouse owned a home for 18 months and you used it as your principal residence for this period, then divide 18 by 24 and multiply by 500,000.  So you are entitled for a break of $375,000.

Suppose you are unmarried and sold your home 15 months ago and claimed exclusion that time.  Now you want to sell your present home which is owned and occupied for last 18 months.  The reduced amount of exclusion available to you will be 250,000 x (15 months/24 months) = $187,500.

For being eligible to claim this reduced exclusion, the premature sale you made must be due to a change in the place of employment or due to health reasons or due to other unforeseen circumstances.

Premature sale on changing the place of employment

If a qualified individual happens to change the place of his/her employment, that can be your primary reason for premature sale of your home, acceptable to the IRS.  A qualified individual may be you, your spouse or any co-owner of the home or anybody whose primary residence is in your household. The new place of employment must be minimum 50 miles away from the former residence.

Premature sale on health grounds

There are two health grounds acceptable to the IRS.

  1. If you have to move in order to provide or get the diagnosis, cure or treatment of a qualified individual due to an injury, illness or disease.
  2. If you have to provide or get medical or personal care for a qualified individual suffering from an injury, a disease or an illness.

Again, qualified individual means either you, or your spouse or a co-owner of the home or any close relative if whose principal residence is in your household.  Any close relative may be your sibling or a stepchild.  Your first cousin can also be counted as a qualified individual.

When a doctor recommends a change of residence on health grounds, his word is acceptable to IRS.

Premature sale on account of unforeseen circumstances

If some unforeseen circumstances force you to make a premature sale of your home, you can claim proportionate exclusion.  It may be any of the following events

  1. Death of a qualified individual
  2. Eligibility of a qualified individual for unemployment compensation.
  3. Change in employment status resulting in your inability to take care of your housing cost and living expenses.
  4. Divorce or legal separation of a qualified individual
  5. Pregnancy of a qualified individual resulting in multiple births
  6. A man-made disaster or act of terrorism.

Remember, you need to keep ready some documentation or evidence to support your claim.


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