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Despite tax reform in 2018, the rules on capital gains exemptions haven't changed for either the 2018 or 2019 tax year. Single taxpayers can still claim an exemption of up to $250,000 in qualifying home sales, and married couples filing jointly can claim up to $500,000. Here's what you need to know to qualify for this tax break.
How Much Can You Exclude in Capital Gains on Your Home Sale?
For the 2019 tax year, single taxpayers can exempt up to $250,000 in capital gains on their home sales, and married couples filing jointly can exempt up to $500,000 in capital gains exemptions. In either case, these exemptions are contingent on certain requirements and apply only to the sale of a primary home.
Home Sale Tax Exemption: By the Numbers
- Up to $250,000 in capital gains on home sales can be excluded for single filers.
- Up to $500,000 in capital gains on home sales can be excluded for married joint filers.
- These limits apply to the sale of primary homes completed in both 2018 and 2019 (as well as all primary home sales since 1997).
- Sellers are free to use proceeds from the sale as they wish.
These tax rules were enacted as a result of the Taxpayer Relief Act of 1997. This law supersedes previous rules that required sellers to roll the proceeds of their home sale into another home within two years to avoid incurring a capital gains liability. The new tax laws give homeowners more flexibility on how to use their money.
Are You Eligible for the Full Capital Gains Exemption?
In order to be eligible for the full capital gains exemption on your home sale, you must meet the IRS eligibility test, which determines whether you qualify for the maximum exclusion of gains ($250,000 for single filers and $500,000 for joint filers). The eligibility test requires you to pass the following four requirements.
You will be automatically disqualified for the exemption if:
- You're subject to the expatriate tax, which is required for resident aliens, or
- You acquired the property through a like-in-kind exchange over the past five years.
You must be the owner of the property for at least two of the past five years. Only one spouse needs to meet this requirement.
You must have used the home as your primary residence for at least two of the past five years. The residency does not have to be completed consecutively, but both spouses must meet this requirement.
The capital gains exemption must not have been exercised within the past two years.
Borrowers who pass all of the checks above may exclude the maximum exemption allowed by the IRS. However, the IRS does permit you to circumvent the eligibility test if you fall under a special category, as defined below.
Are You Eligible for a Partial Capital Gains Exemption?
Even if you don't qualify for the full exemption, you may still be eligible for a partial exemption on the capital gains tax on your home (you cannot be eligible for both the full and the partial exemption).
The IRS is fairly lenient toward homeowners who need to sell their homes due to a number of special circumstances. See if you're eligible for a partial exemption under any of the listed scenarios below.
Change of workplace:
You took a new job or were transferred to a job site that's located more than 50 miles from your original home. The 50-mile distance applies to new workplaces if you were not previously employed.
You moved to provide for the medical care of a close family member or as the result of a doctor recommendation in order to treat a health problem. Family is defined by the IRS as a:
- Parent, grandparent or stepparent
- Child, grandchild, stepchild, adopted child or eligible foster child
- Sibling, half-sibling or step-sibling
- Parents or siblings by nature of marriage (e.g., mother-in-law)
- Uncle, aunt, nephew or niece
Move due to unforeseeable event:
Your home was destroyed/condemned, or was the casualty loss of a natural/man-made disaster or act of terrorism.
Move due to life event:
Your spouse or anyone who used the property as their primary residence passed away, separated from you through divorce, was unable to pay for basic household living expenses, or in some cases, became eligible for unemployment benefits.
Move due to expanded living needs:
This applies to the birth of two or more children as the result of the same pregnancy.
How to Calculate Your Partial Capital Gains Exemption
The amount of your exemption is calculated as a percentage of the full exemption that would have applied, had you met the requirements, proportional to the number of months you lived in the property for up to two years.
For example, if you're eligible for a partial exemption and lived in the residence for 18 out of the past 24 months, you would be able to claim 18 out of 24 months, or 75% of your full exemption (18/24). As a single tax filer, you would then be able to exclude 75% of $250,000, or $187,500 in gains from your tax return. Joint filers would be able to exclude 75% of $500,000, which is $375,000.
Who Doesn't Have to Meet the IRS Eligibility Requirements?
While IRS rules are typically ironclad, the agency allows several exceptions for the capital gains exemption on home sales. This means that even if you don't entirely meet the requirements under either the full or partial exemption, the IRS may allow you to suspend certain portions of the eligibility test for the scenarios listed below.
Exceptions to the IRS Eligibility Rules
- Separated or divorced taxpayers may count the time a former spouse owned the property toward their own ownership requirement, even if ownership was transferred to you via a divorce agreement. You must still meet the residence requirement on your own.
- Widowed taxpayers who sell their homes within two years of the death of their spouse, and haven't remarried in the meantime, can count the time their late spouse lived in the home (with or without you) toward both the ownership and residence requirements. Furthermore, widowed taxpayers are still eligible for the full $500,000 exemption if they meet the aforementioned requirements and sell the property within two years of their spouse's death.
- Military personnel, members of the foreign service and Peace Corps away on qualified extended duty may be able to suspend the five-year mandate on ownership and residency. This allows you to count years prior to your assignment toward the IRS eligibility test. To illustrate this example, if you bought the property more than seven years ago but were stationed overseas on extended duty for the past five years, the IRS may allow you to suspend the most recent five-year requirement for the purposes of the eligibility test. The two years you resided in the property prior to being stationed overseas could then be applied toward both your ownership and residency requirement.