Most home sellers have a specific reason for choosing to list their property for sale at a particular time. Although each owner has a primary reason for selling, the notion of optimal timing usually plays a lesser role in the decision. Homeowners who expect a gain on the sale of their property may improve the overall financial outcome by timing the gain so that it is not taxable.
A rather unique tax treatment is potentially available to individuals and couples who sell their personal residence at a gain. The tax code allows an individual to exclude up to $250,000 in profit. A married couple may exclude up to $500,000 in gain. Because the exclusion limits are so favorable, prospective home sellers might decide to postpone the closing of a sale if the delay helps meet the exclusion rules.
To qualify for the exclusion, you must have owned the home as your main residence for at least two years out of the last five years preceding the date of sale. The two years of ownership can be any duration within the overall 5-year period. If your time of ownership is slightly less than two years, the closing date of the sale can be delayed so that your period of ownership reaches two years.
In addition to the ownership requirement, there is a similar 2-year occupancy requirement. Your times of ownership and occupancy do not necessarily have to coincide. However, both requirements must be satisfied by the date of sale in order to qualify for the $250,000 and $500,000 exclusion limits.
Reduced exclusion limits
It is not practical to postpone all home sales until the 2-year requirements are met. Unforeseen circumstances may require you to list your home on the market and close the sale without any unnecessary delay. There are certain situations that can result in a gain exclusion without meeting the 2-year requirements. You may receive a so-called partial exclusion if the sale of your home is related to one of the following events.
- A medical-related move recommended by a doctor
- A job-related move of over 50 miles
- Eligibility for unemployment benefits
There are other unforeseeable events that may also lead to a gain exclusion. For a partial exclusion, you are allowed a percentage of the regular $250,000 or $500,000 limits. Your applicable percentage is the percentage of two years that you actually met the ownership and occupancy requirements. For many home sellers, however, the reduced exclusion limitation may still exceed the amount of the gain itself.
The tax outcome is important, but it is only one of many factors to consider when listing homes for sale. Contact a sales agent for more information about listing your home for sale.