Home Sellers’ Tax-Free Profits Aren’t A One-Time Opportunity

Did you know this important detail? The tax code authorizes “exclusions” that allow home sellers to completely avoid federal and state income taxes on sizable portions of their profits when they sell the principal (main) residences. That means tax-free profit on the first $500,000 for married couples who file joint returns and $250,000 for single filers and couples who file separate returns.

Plus contrary to what many sellers believe, the exclusions aren’t one-time opportunities. They can avail themselves of the exclusions as often as every two years. And you no longer need to buy a replacement home to qualify! (many, many years ago, you did)

The law allows a seller we’ll call “Barbara” to qualify for the exclusion, and she only has  to satisfies two requirements:

  1. She has owned and lived in the property as her principal residence or main home for at least two years out of the five-year period that ends on the date of sale.
  2. She can’t have excluded the gain on the sale of another principal residence within the two years that precede the sale date.

An accommodating Internal Revenue Service cuts the seller some slack on the two years that they occupy the home. Plus the two years don’t have to be consecutive; they can actually be off and on for a total of two full years. Like maybe you lived there for a while, and you moved out and turned it in to a rental for a couple of years, then you moved back in and then you sold it. As long as it was your main home for 2 of the previous 5 years, you’re good!

What about short temporary absences for vacations or other seasonal absences? No problem, says the IRS. It’s OK for the seller to count them as periods of owner use. This holds true even if the seller rents out the property during the absences.

The IRS doesn’t limit exclusions to sales of conventional single-family homes.

It considers Barbara’s principal residence to be any of the following:

  1. A condominium.
  2. A cooperative apartment.
  3. Her portion of a multi-unit apartment building.
  4. A house trailer.
  5. A mobile home.
  6. A houseboat or yacht that has facilities for cooking, sleeping and sanitation (although boats and mobile homes don’t usually go up in value).
  7. A vacation retreat that she moves into full time after retirement.

Another plus: The location of her principal residence doesn’t matter. It can be outside the U.S.

Partial profit exclusions.  Let’s say Barbara sells another home within the previous two years or fails to satisfy the ownership and use requirements; all is not lost. She may be able to claim a partial exclusion.

Primary reasons for sales.The IRS permits sellers to avail themselves of reduced exclusions only when the primary reasons are health problems (for example, if Barbara  moves to a new school district for her special-needs child); changes in employment; or certain unforeseen circumstances, broadly defined to include divorces or legal separations, or natural or man-made disasters that cause residential damage — floods, for example.

An example: Barbara is single and has lived in her dwelling for just 12 months before she moves to a new job in another city. She can exclude a gain of as much as $125,000 — 12 months divided by 24 months, or 50% of her maximum allowable $250,000 exclusion.

The bottom line? Don’t make assumptions about what you may or may not be taxed on if you decide to sell. Talk with a tax professional to make sure you get everything you’re entitled to understand the rules. I have had a few clients over the years decide to go ahead and sell because they found out their profit is tax-free!

(BTW – if you want to sell your investment property and legally defer the taxes indefinitely, there is a way to do that too, but we’ll save that for another day – or you can call me)

Do you have a need for commercial/industrial/retail buildings or land? Are you ready to buy or sell a home? Do you want a guaranteed cash offer? We can help you with all of that… just call us at 702 SELL NOW or click on this link to my website http://www.702SellNow.com

Choose to have an amazing day….Jeff

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