Tax Preparation online help - Taxes on Sale of Home
This section of Tax Preparation Online help covers taxes on sale of home. Your home is often your most significant asset. Knowing rules on taxes on sale of home can help you maximize your after tax return on your sale of home investment. Luckily, your home can also be your biggest tax shelter. The IRS tax code allows you to deduct interest paid on a home mortgage, within certain limits, from your adjusted gross income.
Rules of taxes on sale of home
When you sell your home, you generally are able to exclude up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a principal residence. The sale of home tax exclusion is allowed each time you sell or exchange a principal residence, your home, that meets the eligibility requirements, but generally no more frequently than once every two years.
Taxes on sale of home exclusion
To be eligible for the taxes on sale of home exclusion, you must have owned the home and occupied it as a principal residence for at least two of the five years prior to the sale or exchange. If you fail to meet these taxes on sale of home exclusion requirements by reason of a change of place of employment, health, or other unforeseen circumstances, you are able to exclude taxes on sale of home the fraction of the $250,000 ($500,000 if married filing a joint return) equal to the fraction of two years that these requirements are met. For example, if you used property as a principal residence for 18 months in the five years prior to sale, up to 75% of the $250,000 or $500,000 limitation would be excludable.
The taxes on sale of home exclusion rule should allow you to base future housing decisions on personal and nontax financial considerations following the sale of a current home. If you are planning a postretirement move to a "lowercost" area, you can "trade down" to a less expensive home rather than feeling pressured to reinvest the sales of home proceeds in a new home of equal or greater value simply to reduce taxes.
You will then be able to put some of your home equity to a different use by, say, reinvesting a portion of the sales proceeds in higher growth or income producing investment assets.