Taxpayers who sell their principal residences may be exempt from paying federal income taxes on the proceeds. The Internal Revenue Service (IRS) allows taxpayers to claim an exclusion from declaring any gains or proceeds on their home sales if they meet the federal tax code's ownership and use tests.
Qualified taxpayers who pass the ownership and use tests can exclude up to $250,000 in gains received from their home sales, as of 2011. For married taxpayers filing their taxes jointly, the limit increases to $500,000. This tax exclusion allows taxpayers to walk away without owing any federal income taxes on the sale of their homes if their sales proceeds were less than $250,000 or $500,000 and they qualified as eligible taxpayers under the use and ownership tests.
Taxpayers can take advantage of the special IRS exclusionary rule if they owned their homes for at least two years. The IRS requires taxpayers to live in their homes and use their homes as their primary residence for at least two out of the last five years preceding the sale date. According to the Internal Revenue Code, a taxpayer may only have one principal or primary residence at once.
In addition to meeting the use test, homeowners must also pass the ownership test. A main home includes a single-family home, condominium, mobile home, cooperative unit, houseboat or recreational vehicle. A taxpayer's principal residence is her primary home or the home in which she lived in for the majority of the tax year. To determine whether a taxpayer's home is her primary residence, the IRS can consider several things, including reviewing the address that she uses to receive her mail, the address listed on her driver's license and tax returns, where her family resides and where she works.
Special Tax Rules for Married Taxpayers
The IRS limits the tax-free treatment of home sales profits to taxpayers who have not sold another home and received tax-free benefits within the last two years preceding the sale of their current homes. However, the IRS uses special tax rules for single taxpayers who sell their homes, later marry and sell their marital homes together. In this case, the IRS allows each of them to exclude their proceeds while they were single, but they do not qualify for the subsequent exclusion as married taxpayers.
The IRS also has special tax rules for taxpayers who sell their homes without occupying them for at least two years because of a disability or death of family members. These taxpayers qualify for a one-year exclusionary rule. Furthermore, taxpayers who are active military service members qualify for a separate exclusion, and they may be able to pass the continuous use test without actually living in their homes.
Jill Stimson has worked in various property management positions in Maryland and Delaware. Stimson worked for the top three property management companies in the commercial industry and focuses her career on property building logistics and tenant relationships. She holds a Juris Doctor and a Bachelor of Science in psychology.