SAFE AS HOUSES

Understanding the valuable home sale tax exclusion and your eligibility

bill and homeowners insurance contract.

Use test: The home sale tax exclusion is only available for the sale of a primary residence. The IRS considers a primary residence to be a home you have lived in for at least two of the previous five years before selling the home. The two years don’t have to be successive, but you must show that you lived in the house for a total of 24 months, or 730 days, in the past five years.

If you don’t pass the use test, you may still qualify for the home sale tax exclusion in certain situations. For example, if you’re selling your home due to a change in employment, health or other unforeseen circumstances, you may still be eligible for a partial exclusion.

If you meet the ownership and use requirements, you can take the home sale tax exclusion as many times as you want, but not more than once every two years.

How the home sale tax exclusion works in real life: Let’s say you purchase a home for $700,000 that is now worth $800,000. If you sell the home for that amount, it’s considered a $100,000 profit ($800,000 - $700,000.) Individuals can exclude up to $250,000 of profit from a home sale, which means you won’t owe any capital gains taxes. If you don’t qualify for the home sale tax exclusion, you would be responsible for paying capital gains taxes on the entire $100,000.

However, if you purchase a home for $700,000 and sell it for $1,000,000, that is a $300,000 profit. Any gain above the exclusion amount—in this case, $50,000 ($300,000 - $250,000) is subject to capital gains tax. If you’re married and file a joint tax return with your spouse, you wouldn’t owe any taxes since the exclusion amount for couples is $500,000.

Understanding the home sale tax exclusion can help alleviate some of the uncertainty around selling your home.

What happens if you don’t qualify?

Not all homeowners qualify for the home sale tax exclusion.

You may not be eligible for the tax break if:

• You haven’t owned and used the property as your primary residence for at least two of the previous five years.

• You have already used the home sale tax exclusion within the past two years.

• You acquired your home through a 1031 exchange within five years.

Even if you don’t qualify, there are other ways to reduce the taxes from selling your home. Tallying up the costs of home improvement projects is one way to reduce your taxable gain.

Deductible home improvements include:

• Bedroom or bathroom additions

• Replacing walls and floors

• Updating heating and cooling systems

• Any other major projects that add value to your home

Understanding the home sale tax exclusion can help alleviate some of the uncertainty around selling your home. It’s important to note that many factors can impact your eligibility for the home sale tax exclusion, and you should consult a tax professional for advice on your specific situation.

Eric Braund, CFP®, CRPC® is the founder and CFO at Black Walnut Wealth Management, a financial advisory firm providing counsel and fiduciary financial services to individuals, families, and private foundations throughout the Traverse City and northern Michigan region. Contact him at (231) 4217711 or visit BlackWalnutWM.com

Braund is an investment advisor representative with Dynamic Wealth Advisors, dba Black Walnut Wealth Management. All investment advisory services are offered through Dynamic Wealth Advisors.