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Busting Myths About the Home Sale Gain Exclusion

Busting Myths About the Home Sale Gain Exclusion

Moving can be stressful, but the sale of your home can also mean that you have to deal with the tax implications from your profits. This is because any profits are subject to income tax based on your particular tax bracket. Thankfully, there is the home sale gain exclusion offered by the IRS that will apply to a majority of home sales. Thus, most of the profits from the sale of your home will be tax free. However, to determine if your profits fall under the exclusion or if they will add to your tax liability, be sure to discuss your home sale with your tax professional or accountant, such as EB TAX CONSULTANTS in BROOKLYN, NY.


Here are a few of the myths of the home sale gain exclusion versus the reality.

Myth – You can’t claim the exclusion if you are not living in the house at the time of the sale.

Fact – The truth is that you have to live in the house for two of the last five years prior to the sale. The years do not have to sequential, but you do have to have two full years with the property as your primary residence.

Myth – You can’t claim the capital gains exclusion unless you are over the age of 55.

Truth – This used to be the case, but the Taxpayer Relief Act of 1997 ended that rule. Now this exclusion can be used by all taxpayers, regardless of age. However, there is other criteria that the taxpayer must meet, which we discuss below.

Myth – You can claim the home sale gain exclusion to multiple homes.

Truth – The exclusion can only be claimed for one house at a time and it must be your principal residence. So the exclusion cannot be claimed for your primary residence and a vacation home in the same year. However, if you sell your primary residence and move into your vacation home for two years, then you can claim the exclusion on the sale of the vacation property. This is true if all the criteria are met.

Myth – You can claim a capital loss if you lose money on the sale of your home.

Truth – While you do have to report and pay tax on the capital gains from the sale of your house, the converse is not really true. Essentially, you cannot claim a capital loss one the sale of your home, even in the case of a short sale or other negative circumstances that contribute to a loss.


Criteria for Home Sale Gain Exclusion


There are three criteria that must be met to use the home sale gain exclusion. If these criteria are not met, then the gains or profit from your property’s sale will need to be taxed as either short- or long-term capital gains.

  • Ownership – Must have owned the home you are selling for at least two years during the five years prior to the sale
  • Timing – You must not have excluded the gain on another home sale within the two years prior to the current sale
  • Use – You must have used the home as your principal residence for at least two of the five years prior to the sale. These two years do not necessarily have to be consecutive.

Note that married taxpayers, you will need to file jointly and at least one of you need to have owned the house for the required amount of time. However, there may be exceptions where you might have met the criteria but are still able to claim a portion of the exclusion.

Below are the unique situations that would qualify for a partial use of the exclusion, such as:

  • Change of employment
  • Change of health
  • Unforeseen circumstances
  • Divorce
  • Multiple births from the same pregnancy
  • Broken engagement of a couple who bought a home jointly

An example would be a married couple who had to sell their home due to a divorce settlement. If they lived there for a year, then they would be entitled to half of the exclusion, which is $250,000. Thus, their profit, as long as it was under $250,000, would not be taxed. To determine if you can take a portion of the exclusion, discuss your specific situation with your tax professional.


To wrap up, the home sale gain exclusion provides the legal means to collect untaxed profit from the sale of your home. Keep in mind, the only way to use this exclusion is to meet the criteria previously outlined.

Click on the link below to contact one of the tax professional or accountant at EB TAX CONSULTANTS in BROOKLYN, NY, to discuss the impact of your home sale on your tax liability.

ERNIE BUSTAMANTE
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