Excluding Home Sale Gain Every Two Years - Cameron & Associates, Inc.

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Excluding Home Sale Gain Every Two Years

The tax code allows the home sale gain exclusion every two years, provided the rules are followed.

Let's assume you own a home, a second (vacation) home, and a rental property. All of these properties have significantly appreciated in value over the past few years. Now it's time to cash in on the appreciation. With careful planning, it is possible to apply the full home sale exclusion on all three of the properties.

Here is how it works. The tax code allows you to exclude up to $250,000 ($500,000 for married couples) of gain from the sale of your primary residence if you have lived in it and owned it for two of the five years immediately preceding the sale and you have not previously taken a home sale exclusion within the two years immediately preceding the sale. In addition, there is no limit on the number of times you can use the exclusion as long as the requirements are met.

It makes sense to start off by selling the home you currently live in because you probably already meet the two-out-of-five years ownership and use tests. The next step would be to move into either the rental or the second home and make it your primary residence.

After you have lived there for two full years and it has been over two years since the previous home was sold, you can sell the property and take the home sale exclusion again. The final step would be to occupy the third residence and live there for the required amount of time. When that time is up, you can sell it and take the third exclusion. This makes it possible for a married couple to exclude as much as $1,500,000 of income in just over four years if they follow the rules carefully and time the sales correctly.

The only catch is when the rental is sold. The tax code does not allow you to use the exclusion to offset profit that is attributable to the depreciation that you claimed on rental property during the time it was rented. However, the home sale exclusion can be used to offset any other gains from the rental up to the exclusion limits.

There is one final issue to consider. If any of the residences were acquired though a tax-free exchange from another property, then the residence must be owned for a period of five years prior to its sale in order to qualify for the exclusion.

Since situations may differ, we highly recommend that you consult with this office prior to initiating such a plan.