Homeowners who want to relocate or move to larger or smaller quarters should determine whether it's in their best interest to sell their current residence. In making this decision, homeowners should consider the impact their decision will have on their tax bill and personal financial situation.
Selling a principal residence is an option for homeowners who need the equity in their current home for a down payment on a new one. Homeowners who realize profits on the sale of their primary residence may qualify for a special tax break that can help to put their next home within financial reach: The tax law creates 100% tax-free home sale profits for qualifying taxpayers who sell their homes.
This exclusion replaces the previous deferral-of-gain rule that required taxpayers to purchase a replacement home within certain time and price limits. It also replaces the once-in-a-lifetime exclusion of up to $125,000 of gain in a home sale for qualifying taxpayers age 55 and older.
The exclusion for home-sale profits.
Under the current rules, a seller of any age, who has owned and used the home as a principal residence for at least two of the five years preceding the sale, may exclude from taxation up to $250,000 of profit, if single, and up to $500,000, if married filing jointly. Generally, the exclusion may be used only once every two years.
The law provides that married individuals may exclude up to $500,000 of profits if:
either spouse owned the home for at least two of the five years before the sale,
both spouses used the home as a principal residence for at least two of the five years before the sale, and
neither spouse is ineligible for the exclusion because of the once-every-two-year limit. If one spouse cannot use the exclusion because of the once-every-two-year rule, the other spouse may still claim the exclusion if he or she qualifies. However, the exclusion then cannot exceed $250,000.
Renting a home.
A homeowner who puts his or here former principal residence on the market and then encounters difficulty in selling it, may be able to rent the residence for a temporary period and still defer gain on the sale. Planning can allow gain on the sale of a rental or vacation home to meet the requirements for the home sale exclusion. You can convert the property to your personal residence prior to the sale. If you meet the two-year ownership and occupancy requirement, some or all of the gain on the sale may qualify for the exclusion.
If you have picked out a new home but cannot or do not want to sell the old home just now, consider renting the old home. You can rent the old home for up to three years, and still qualify for the gain exclusion. The rental for three years, will mean that you used the house as a principal personal residence two of the past five years and any gain at the sale will be excludable (except for depreciation taken after May 6, 1997.) The rental period may allow you to get a better price in a slow seller's market, take advantage of an escalating real estate market, or change your mind and move back to the old house. For example, Sharon is moving from California to Oregon. The California real estate market is hot and she decides to rent out her old personal residence for a few years. The rental period allows her a chance to make some money from appreciation on the California house and still exclude gain at the subsequent sale because she will have lived in the California house two of the five years if she rents for less than three years. If she doesn't like Oregon, she still owns the California house and can return to it.