One of the best tax breaks for most people is the so called "principal residence exclusion." If you qualify, you can deduct up to $250,000 from the sale of your primary or principal residence.
To see why this is a great tax break, consider the following example. Suppose you bought your home twenty years ago for $50,000, made no improvements to it, and sold it this year for $300,000. You would have a gain of $250,000, the difference between what you sold it for ($300,000) and what you paid for it ($50,000). However, because of the principal residence exclusion, your taxable gain would be zero - meaning you would owe no tax. If the property did not qualify as your principal residence, the gain would be taxable.
If you are married and file a joint tax return, it's even better. You can deduct up to $500,000.
How long must I live in the home to qualify?
You must have owned the home and used it as your primary residence for at least two out of the last five years. These dates are measured as of the date the home is sold.
For example, if you bought your home at least two years ago and have lived in it since that time, you qualify. If you bought it six years ago and lived in it for four years and then moved out, you would still qualify, because you had been in the house for more than two years out of the last five.
These are the basic rules, but there some exceptions - such as a forced second sale (required by your job) in less than two years or time spent in a nursing home. If you have one of these situations, you may want to discuss it with a tax expert.
How often can I claim this exclusion?
This is not a one-time exclusion. You can use it again and again - so long as you wait at least two years between sales. If you bought a home on January 1, 1997, and sold it on February 1, 1999, the sale would qualify. If you then bought another home on June 1, 1999 and sold it on July 1, 2001, that sale would qualify too. If you need more information on tax breaks, consult with a tax attorney in your area.
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