Upon the sale of your primary home, you can avoid paying capital gains tax if you meet certain requirements. Your primary home is the property in which you live most of the time. It can be a house, houseboat, mobile home, cooperative apartment, or condominium.
As a single person, you can exclude up to $250,000 of capital gain from your income and as a married person, you can exclude up to $500,000. If you are unmarried, and you share the ownership of the home jointly with someone else, and file separate tax returns, then you can each exclude up to $250,000.
In the majority of cases, you can exclude capital gains tax from the sale of your main home if you owned and lived in the home for at least two years out of the five-year period ending on the date of sale. If you have, then you have satisfied the ownership and use tests. Additionally, you must not have excluded any gain from the sale of another home during the two-year time frame ending on the date of sale.
The two years of ownership and use do not have to be continuous. Nor do they have to occur simultaneously.
An exception to the ownership and use tests is that in some instances, if you owned and lived in your home for less than two years, you may be able to exclude a reduced amount of your capital gain.
For example, if you become disabled, and you owned and lived in your main home for at least one year during the five-year period prior to the sale of your home, then you are deemed to live in your home at any time during the five-year period that you own the home and reside in a facility, such as a nursing home, that is licensed by the state or political subdivision to treat those who are disabled. However, in order to claim the exclusion, you still have to satisfy the ownership test. Another exception applies if your prior home was destroyed or condemned.
In this case, you add the time that you owned and resided in your prior home that was destroyed or condemned, to the time you owned and lived in your replacement home, which is the home you are selling, and from which you would like to exclude capital gain. The exception only applies if any portion of the basis or cost of the home you sold was dependent upon the basis or cost of the destroyed or condemned home. If not, then you must meet the two-out-of-five-year ownership and use tests.
If you would like to know if you qualify to exclude capital gain from the sale of your home, you should consult a business attorney.