The federal sale of residence exemption is a bright spot on the landscape of the federal tax scheme which allows homeowners who sell their homes at a profit to have their profit NOT be taxed.
Is All the Profit from the Sale of My Home NOT Taxed?
No. The IRS has put limitations on the untaxed profit gained from the sale of a home. In an effort by the IRS to limit wealthy real estate speculators from taking too much advantage on this exemption in the tax code, the federal government has limited the untaxed profit to a particular dollar amount. As of 2004 the amount exempt from taxation is $250,000 of the sale price for a single taxpayer and $500,000 of the sale price for married taxpayers. Any amount exceeding these numbers is taxed as gross income of the taxpayer, and taxed at the taxpayers going rate.
Are There Any Limitations to This Exemption?
In order to take advantage of this exemption, the taxpayer must intend to exclude their profit from the sale of their principle residence. In another attempt to limit wealthy taxpayers from taking advantage of the tax code, the IRS has limited the tax exemption to those properties used as the primary personal residence. To police this, the IRS requires that the taxpayer must have lived in and used the property for two of the last five years.
How Many Times May a Taxpayer Qualify for This Exemption?
Each time a taxpayer qualifies for this exemption he may take the it. As long as a taxpayer qualifies, he or she may sell a profitable home every two years and take the exemption tax free. It should be noted that this provision is based on presumption that the taxpayer will take the profit earned from a sale of their home and use it to buy a new and better home, but things do not always work out this way
Should I Contact a Real Estate Lawyer?
If you are considering selling your home, it is advisable to consult with an experienced real estate lawyer. He or she will be familiar with the tax code and will be able to guide you in your sale and ensure a tax exemption for any profit you may gain. In some states, such as New York, a lawyer is required on both sides of the transaction when a residence is sold. The family residence is generally the largest asset a person or family can own, and it is a wise choice to check with a lawyer regarding tax consequences before selling your home.