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Selling your home? Know the tax consequences.

Tax implications are deeply interwoven into the experience of home ownership. The tax deduction for home mortgage interest ensures that this is the case.

But the deductibility of mortgage interest is not the only tax issue that can affect homeowners. For one thing, the taxation of mortgage debt relief following a foreclosure or short sale has been an ongoing issue in recent years. We discussed that issue in our September 16 post.

In this post, we will discuss a question that invariably comes up when a house is sold. How much of the profit from the sale of a home can be excluded from income?

The general rule is that for the sale of a primary residence, a married couple who file their taxes jointly can exclude up to $500,000 in profit from their taxable income. For single taxpayers, the limit on the exclusion amount is half that number: $250,000.

There are, however, a few qualifying conditions that must be met. One of those is a duration requirement regarding how long you have owned and occupied the house.

How long do you have to own the house and live in it in order to exclude the maximum amount you can from taxation when you sell it?

The answer is that, in the five years leading up to the sale, you must have owned the home and used it as your primary residence for a minimum of two years. Only if the two-year minimum is met can you claim the maximum exclusion from income on profit from a sale.

Not everyone who sells a home can meet these conditions on duration of ownership and use in order to take the maximum exclusion. But as the IRS explains in its Publication 523, a “reduced exclusion” may still be available under certain circumstances.

If you are uncertain about how to proceed, it makes sense to discuss your specific situation with a tax attorney. After all, you don’t want to make a dispute with the IRS part of your real estate transaction.

Source: Wall Street Journal, “The Tax Exclusion on a Home Sale,” Tom Herman, Oct. 18, 2014

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