If you sell your main home, the IRS lets you exclude a chunk of the gain from your taxes. Up to $250,000 if you're single. Up to $500,000 if you're married filing jointly. Done right, that's potentially hundreds of thousands of dollars never touched by the IRS.
The two tests you have to pass
To get the exclusion, you need to satisfy both of these inside the five years leading up to the sale:
- Ownership test. You owned the home for at least two years.
- Use test. You lived in the home as your main residence for at least two years.
The two years don't have to be back-to-back, and they don't have to be the same two years. You could own a home for five years, rent it out for three, live in it for two, and still qualify.
The married-couple twist
For the full $500,000, only one of you needs to meet the ownership test, but both of you have to meet the use test. And neither of you can have used the exclusion on another home in the last two years. If only one spouse qualifies, you're capped at $250,000.
What you can't exclude
Two things still get taxed even if you qualify:
- Depreciation recapture. If you ever rented out the home or used it for business and claimed depreciation, that piece of the gain is taxed.
- Nonqualified use. Time after 2008 when the home wasn't your main residence (a rental period, for example) reduces the excluded amount on a pro-rata basis.
The partial exclusion when life happens
If you have to sell before hitting the two-year mark because of a job move, a health issue, or an unforeseen event (divorce, multiple births, job loss), you can still get a prorated exclusion. A military or Foreign Service member can also pause the five-year clock for up to ten years of qualified extended duty.
The bottom line
For most homeowners, this is the single biggest tax break you'll ever use. Plan the sale around the two-year clock and the once-every-two-years rule, and the IRS picks up none of the gain. A Breadify membership maps the timing before you list.