In the not-too-distant past, homeowners watched in horror as their most prized asset plummeted in value and their prospects of realizing a profit on its sale rapidly diminished. Fast forward to the present, however, and things are considerably different.
Indeed, with the recession now fully in the rearview mirror and the economy continuing to improve, it’s once again become a seller’s market for residential real estate. As encouraging as this development is for homeowners, questions naturally arise as to how the Internal Revenue Service treats the sale of a primary residence.
In general, the IRS rules governing homes sales dictate that single people can exclude a maximum of $250,000 in proceeds realized from the sale of the primary residence, while a married couple filing a joint return can exclude a maximum of $500,000.
It’s important to understand that single people and married couples will not qualify for this maximum exclusion unless 1) they actually own the home and 2) use it as their main domicile for a minimum of two of the five years preceding the sale date. Regarding this second point, there is no need for the 24-months to be consecutive.
Another important issue to keep in mind is that this maximum exclusion on home sales isn’t just a one-time deal. In fact, IRS regulations dictate that the exclusion can be taken every time the primary residence is sold, but no more than once every two years.
Finally, when it comes to the sale of the primary residence, experts do indicate that those who live in typically expensive real estate markets — like Los Angeles, New York and, of course, Boston — and realize especially large profits should anticipate paying federal taxes (long-term capital gain, net investment income, etc.).
It’s important to understand that there are scenarios in which a person who wouldn’t otherwise qualify for the maximum exclusion can still secure some measure of relief and scenarios in which the underlying circumstances of the homeowner can make tax issues much more complicated. In these situations, it can be highly beneficial to consider speaking with a skilled financial professional or even a legal professional in the event problems with the IRS arise.