For the vast majority of sellers the basic rules apply and are fairly straightforward: if a seller makes a profit on the sale of their home and they have lived there at least two years in the past five, they will be able to exclude much if not all of their capital gain ($250,000 individual; $500,000 married filing jointly). Note the amounts refer to the gain, or profit, not to the sales price of the home. Note also that profit is not necessarily (indeed almost certainly not) the same thing as the amount of seller proceeds shown on the HUD-1.
Basic Rules
Sellers can exclude up to $250,000 ($500,000 for a married couple) in profit (gain) from the sale of a main home (boats and vacant land might count). They must meet certain tests, and the amount depends on whether they are married or single.
Single Seller:
A seller can exclude up to $250,000 of the gain on the sale of the seller's main home if all of the following are true.
· The seller meets the ownership test.
· The seller meets the use test.
· During the 2-year period ending on the date of the sale, the seller did not exclude gain from the sale of another home.
Married Sellers:
Married couples can exclude up to $500,000 of the gain on the sale of their main home if all of the following are true.
· They are married and file a joint return for the year.
· At least one spouse meets the ownership test (solves title in one name)
· Both meet the use test.
· During the 2-year period ending on the date of the sale, neither 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.
Non-Married Co-Sellers:
If the seller and another person owned the home jointly but file separate returns, each can exclude up to $250,000 of gain from the sale of his or her interest in the home if each owner meets the three conditions listed above (different rules or amounts may apply if not owned 50/50).
To claim the exclusion, one must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, a seller must have:
· Owned the home for at least 2 years (the ownership test, who is on title), and
· Lived in the home as your main home for at least 2 years (the use test).
The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous. One meets the test if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. You can meet the ownership and use tests during different 2-year periods; however, you must meet both tests during the 5-year period ending on the date of the sale.
Military members can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on "qualified official extended duty" as a member of the uniformed services or Foreign Service of the United States. This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. The period of suspension cannot last more than 10 years. Together, the 10-year suspension period and the 5-year test period can be as long as, but no more than, 15 years. You cannot suspend the 5-year period for more than one property at a time. You can revoke your choice to suspend the 5-year period at any time. You are on qualified official extended duty if you serve on extended duty either: at a duty station at least 50 miles from your main home, or while you live in Government quarters under Government orders. You are on extended duty when you are called or ordered to active duty for a period of more than 90 days or for an indefinite period.
Other Exceptions:
There are other (helpful) exceptions or special rules related to the use and ownership tests such as: individuals with a disability, previous home destroyed or condemned, married persons, death of spouse before sale, home transferred from spouse, and divorce. Consult the IRS regulations and Publication 523 for details.
If a seller owned and lived in the property as the seller's main home for less than 2 years, the seller might be able to claim a reduced exclusion. A seller can claim an exclusion, but the maximum amount of gain the seller can exclude will be reduced (basically, as a prorated function of the amount of time the seller did live there, e.g. 1 year will get you 50% of the exclusion ($125,000) because 1 year is 50% of 2 years), if either of the following is true.
1. The seller did not meet the ownership and use tests, but the reason the seller sold the home was: a change in place of employment, health, or unforeseen circumstances; or,
2. The seller's exclusion would have been disallowed because the seller sold More Than One Home Sold During a 2-Year Period, except that the reason the seller sold the home was: a change in place of employment, health, or unforeseen circumstances.
A change in place of employment, health, or unforeseen circumstances (whichever applies) is considered to be the reason you sold your home if either of the following is true:
1. Your home sale qualifies under a "safe harbor." A safe harbor is a set of certain facts and circumstances that qualifies you to claim a reduced maximum exclusion. Examples of safe harbors are death of the taxpayer, a spouse, a co-owner or any member of the taxpayer's household; divorce or legal separation; a job loss that results in eligibility for unemployment compensation; a change in employment that leaves the taxpayer unable to pay the mortgage or basic living expenses; multiple births from the same pregnancy; damage to the residence resulting from a natural or man-made disaster, or an act of war or terrorism; condemnation, seizure or other involuntary conversion of the property.
2. The primary reason you sold the home was a change in place of employment, health, or unforeseen circumstances. Factors that may be relevant in determining your primary reason for sale include whether: your sale and the circumstances causing it were close in time; the circumstances causing your sale occurred during the time you owned and used the property as your main home; the circumstances causing your sale were not reasonably foreseeable when you began using the property as your main home; your financial ability to maintain your home became materially impaired; the suitability of your property as a home materially changed, and during the time you owned the property, you used it as your home.
1099 Reporting:
Basically, a settlement agent is obligated to report the sale via a 1099 if the sales price is over $250,000 for individuals or $500,000 for a married couple, or they indicate on the form they will not qualify, e.g. a rental, investment property, etc.
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