How Often Can you Sell A Primary Residence?
During the past few months we have had a number of phone calls from sellers who are anxious to sell their homes but have lived in their home less than two years. They are obviously concerned about having to pay capital gain taxes on the profit of their sale. This may be true, but there are a few exceptions and a few changes to the rules pertaining to the sale of primary residences.
The general rule is as follows. A married couple who has owned and lived in their primary residence for at least two years during the five-year period ending on the date of sale, may claim an exclusion of up to $500,000 of gain on a joint return. Under the law, the up-to-$500,000 exclusion may be claimed on a joint return provided that during the five-year period ending on the date of sale: 1) either spouse owned the residence for at least two years, 2) both spouses lived in the house as their primary residence for at least two years, and 3) neither spouse is ineligible to claim the exclusion because an exclusion was previously claimed on the sale of a principal residence within the two-year period ending on the date of this sale. If tests 1 and 3 are met but only one spouse meets Test 2, your exclusion limit on a joint return is $250,000. If you are single person then the exclusion is up to a $250,000 gain.
Generally, no exception is allowed on the sale of a principal residence if you owned or used the home for less than two of the five years preceding the sale. Similarly, an exclusion is generally disallowed if within the two-year period ending on the date of sale, you sold another home at a gain that was wholly or partially excluded from your income.
However, even if a sale of a principal residence is made before meeting the ownership and use tests described above, or it is within two years of a prior sale for which an exclusion was claimed, an exclusion is available if the primary reason for the sale is: 1) a change in the place of employment, 2) health, or 3) unforeseen circumstances. If the sale is for one of these qualifying reasons, you are entitled to a prorated portion of the regular $250,000 or $500,000 exclusion limit. The “facts and circumstances” of your situation must establish that the primary reason for the sale was a change in the place of employment, a health problem or an unforeseen circumstance. Any one of the three reasons can be attributable to you or another “qualified individual”, as defined below.
In addition to yourself, the following persons are considered qualified individuals for the purposes of qualifying for the reduced maximum exclusion: your spouse, a co-owner of the residence, or any person whose main home was your primary residence. For the purposes of the “health reasons” category, qualified individuals include not only the above individuals but also their family members: parents, or step-parents, grandparents, children, step-children, adopted children, grandchildren, siblings, (including step or half-siblings), in-laws, uncles, aunts, nephews or nieces.
When you fall within a safe harbor or meet the primary reason test, you are allowed an allocable percentage of the regular $250,000 or $500,000 exclusion limit, depending on how much of the regular two-year ownership and use test was satisfied, or the time between this sale and a sale within the prior two years. For example, if you owned and lived in your home for 438 days before selling it to take a new job, you are entitled to 60% of the regular exclusion limit, which is based on 730 qualifying days (438/730 + 60%). Although the maximum exclusion is reduced, this may not disadvantage you. If the reduced exclusion limit equals or exceeds your gain, none or your gain is subject to tax.
Please note that this is a broad description of the rules and there are many details involving each circumstance. For more information, please consult your CPA to better advise you in regards to your specific needs.
