Contrary to what many home sellers mistakenly believe, exclusions aren’t one-time opportunities and, moreover, they can avail themselves of the exclusions as often as every two years.
The Internal Revenue Code Section 121 authorizes “exclusions” that allow home sellers to sidestep income taxes on most of their profits when they unload their principal residences.
The exclusions are as much as $500,000 for married couples who file joint returns and $250,000 for single filers and couples who file separate returns.
The Tax Cuts and Jobs Act that Congress passed in December of 2017 made no changes to the exclusion amounts. The law allows a seller to qualify for the exclusion only if they satisfy two requirements:
The seller 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.
The seller can’t have excluded the gain on the sale of another principal residence within the two years that precede the sale date.
The IRS cuts sellers some slack on the two years that they occupied the home. The two years don’t have to be consecutive and can actually be off and on for a total of two full years.
What about short temporary absences for vacations or other seasonal absences? No problem, says the IRS. It’s okay for sellers to count them as periods of owner use. This holds true even if the seller rents out the property during the absences.
Note too, that the IRS doesn’t limit exclusions to sales of conventional single-family homes. The principal residence could be considered any of the following:
a cooperative apartment
a portion of a multi-unit apartment building
a house trailer
a mobile home
a houseboat or yacht that has facilities for cooking, sleeping and sanitation
a vacation retreat that moved into full-time after retirement
Moreover, the location of the principal residence doesn’t matter. It can be outside the U.S. And even if the owner sold another home within the previous two years or fails to satisfy the ownership and use requirements, all is not lost.
The owner may be able to claim a partial exclusion. To qualify, the primary reason for the sale must be health problems, a change in employment, or certain unforeseen circumstances. The IRS’s broad definition of unforeseen circumstances includes divorce or legal separation, or natural or man-made disasters that cause residential damage—Hurricanes Harvey and Irma, for instance.
Finally, let’s say a seller is single and has lived in their dwelling for just 12 months prior to moving to a new job in another city. They can exclude a gain of as much as $125,000—12 months divided by 24 months, or 50 percent of her maximum allowable $250,000 exclusion.
Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting).
Attorney and author Julian Block is frequently quoted in the New York Times, Wall Street Journal, and the Washington Post. He has been cited as “a leading tax professional” (New York Times), an “accomplished writer on taxes...