A Financial Planner Explains How You Can Sell Your Home And Avoid Paying Taxes On The Gain


Did you know you can get up to a $500,000 tax-free gain when you sell a very common investmentyour own home? Thanks to the Taxpayer Relief Act of 1997, you may qualify for a tax exclusion when you sell your primary residence.

According to IRS Tax Topic 701, if youve owned and lived in your home for two out of the last five years, you can exclude a gain of $500,000 from your taxes if you are married (or $250,000 if you file as an individual taxpayer). You just have to make sure you meet the residency requirement (you have to own and use the house as your primary residence for those two years, and you cant have used the benefit already within two years).

Here are two recent examples of people who didnt meet the use test:

Some neighbors of mine recently married and moved to Park City, Utah. They bought a town home close to town where they lived for a year and half before they found my neighborhood, bought a new place, and moved.

Unfortunately, these newlyweds were focused on getting a larger town home with a great view and didnt pay attention to the number of months theyd lived in their old home. They were hit with long-term capital gains tax on their primary residence when they moved, since it wasnt quite two years.

One of my retired clients is on a service mission outside of the UShis second extended trip since he retired a few years ago. It turns out when he and his wife return from their service in a year, they wont have lived in their primary residence very long in total, since they were out of the country (even though its technically their primary residence).

If they decide to sell when they return, in order to take advantage of the tax benefit, they will need to stay there for at least six months to make sure they reach the aggregated two-year period.

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