With many parts of Atlanta experiencing a strong rebound in home prices, more and more sellers are once again seeing a profit from the sale of their home. Most homeowners recall that the IRS, at one time anyway, gave this gain favorable tax treatment. The tax break for the gain on the sale of a principal residence is still alive and well. To many, the rules are a bit fuzzy and are often confused with the old rollover and one-time exclusion rules.
The Taxpayer Relief Act of 1997 allows you to exclude from tax liability up to $250,000 in gain from the sale of your principal residence ($500,000 for married couples filing jointly). In order to qualify for the exclusion, the home must have been your principal residence for at least two of the five years immediately prior to the sale. Continuous two-year occupancy is not required, only an aggregate of 24 months of occupancy during the five year period. Unlike the pre-1997 rules, there is no requirement to roll the gain into a new residence and there is no limit to the number of times that you may take the exclusion.
The gain excluded from tax liability is calculated by subtracting the purchase price plus improvements from the selling price less selling expenses.
The law allows for a proportionate exclusion if you have to sell your home prior to meeting the two year occupancy requirement for health reasons, job relocation or other unforeseen circumstances (use your imagination). In these cases you may exclude a fraction of the gain based on the time you actually occupied the home as your principal residence.
Of course, this article only covers the basics. There are plenty of exceptions and details not addressed here. For more information, consult your tax advisor and/or see IRS Publication 523 at IRS.gov.