Tax Benefits For When You Sell

As the time nears to pay your dues in Club America, your home offers financial shelter from what otherwise could be a taxing expense—especially if you've sold your home when your tax returns are due.

The Taxpayer Relief Act of 1997, credited with having a significant role in keeping the real estate sector ahead of the rest of the economy, is perhaps the best tax shelter your home provides. Generally, the federal tax law says when you sell your home, if you qualify, you can keep, tax free, capital gains of up to $500,000 if you are married filing jointly or $250,000 for single taxpayers, or married taxpayers who file separately.

Under the law, to qualify for the $500,000/$250,000 exclusion, the home must have been your primary residence for at least two of the prior five years. The exclusion is not a one-time deal, but a benefit you can use again and again, theoretically every two years -- provided you qualify each time by meeting the owner-occupied-two-out-of-five-years requirement.

If, for example, you have two homes and live in one for two years, sell it and then live in the other for the next two years and sell it, both sales qualify for the exclusion. Special provisions are available if, through some unforeseen event such as a job change, illness, death of a spouse, divorce, disaster, war or some other hardship, you are forced to sell before you meet the two-year residency requirement.

For qualifying unforeseen circumstances, you can prorate the $500,000/$250,000 exclusion (not your specific gain) if you are forced to sell early. That means if you only live in your home a year (half the two-year requirement) before you are forced to sell because of some qualifying unforeseen event, you can exclude from taxes up to $250,000 (half the exclusion) in capital gains if you are married and file jointly or $125,000 for separate and single filers. Remember, always consult with your CPA for professional advice.