I am worried about losing my job and am thinking about selling my house and downsizing. I think my home has appreciated since I bought it. Will I have to pay taxes if I make a profit on the sale of my home?
It depends (as with many tax issues). Tax incentives intended to encourage people to own a home have underscored Internal Revenue Service tax schemes for years (this general policy is currently reflected in the federal government’s stimulus package tax breaks for some first-time homebuyers).
One of the biggest tax breaks offered to home-owners can occur at the sale of the home. Individuals who have gain from the sale or exchange of their main home may be able to exclude from income all or part of the gain. The IRS defines your main home as the one in which you live most of the time. This exclusion is up to $250,000 for individuals and $500,000 for married taxpayers filing joint returns. The exclusion may be allowed each time that a person sells his or her main home but generally no more frequently than once every two years.
To qualify for the exclusion of gain for a main home, a person must meet the following tests.
Ownership test: Person must have owned the home for at least two years during the five-year period ending on the date of the sale.
Use test: Person must have lived in the home as his or her main home at least two years during the five-year period ending on the date of the sale.
There are numerous rules and exceptions that could impact potential tax breaks concerning the sale of your home that are not discussed in this column. Simply put, it pays to learn the rules and nuances about the potential tax breaks associated with selling your home. Anyone interested in learning more about tax benefits related to selling your main home, check out the IRS’ “Publication 523, Selling Your Home,” available at www.irs.gov.
This article appears in March 27 • 2009.