Primary Residence Tax Benefits

A: I've been recently asked this question a lot by my own clients so figured to make it into a post to clear up any confusion. If you are a homeowner or preparing to purchase your first home, here are the tax relief guidelines (as noted directly from the IRS) that you will have to meet to save the big bucks!

To claim the maximum exclusion on the Capital gains on the sale of your home, you MUST first meet the Ownership and Use tests.

OWNERSHIP & USE TESTS (Out of 5 YR Period)

Owned the home for at least 2 years (the ownership test), and

Lived in the home as your main home for at least 2 years (the use test)

Example 1 - home owned and occupied for 3 years.

Amanda bought and moved into her main home in September 2002. She sold the home at a gain on September 15, 2005. During the 5-year period ending on the date of sale (September 16, 2000 - September 15, 2005), she owned and lived in the home for 3 years. She meets the ownership and use tests.

Now that you are aware of the Ownership and Use Tests that you must pass, you can move on to how much you can deduct. Here are the Maximum Exclusions as noted on the IRS website.

MAXIMUM EXCLUSIONS

You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true:

You meet the ownership test

You meet the use test

During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of gain from the sale of your interest in the home if each of you meets the three conditions just listed.

You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true.

You are married and file a joint return for the year (IT IS NOT REQUIRED THAT BOTH OF YOU ARE ON THE TITLE OR STOCK CERTIFICATE)

Either you or your spouse meets the ownership test

Both you and your spouse meet the use test

During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home

If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property.

UrbanDigs Says: The tax benefits that Uncle Sam provides to you for investing in housing in America is what makes it such a wise investment, and an investment that historically has proven to build wealth and appreciate over the long term. By understanding exactly what you need to do to qualify for the maximum exclusion, you are on the right track towards building wealth and living a financially sound and independent life! Good Luck!