Dale McNabb
Associate Broker
What's Your
Home Worth?
Tax Free Income When Selling Your Home
There aren’t many ways to earn money without the government taking a tax bite As long as you meet these requirements, you may qualify for up to $250,000 single or $500,000 for married couples, of tax-free income every time you sell a home.
- To exclude the full amounts allowable from your income, you must own and occupy your home as your principal residence for at least 2 of the 5 years prior to its sale. Generally, you are only permitted to use this exclusion every 2 years. However, if you move sooner for health or job relocation reasons, a partial exclusion may apply.
- You can also create tax free income when you sell a rental or vacation home as long as you have owned and occupied it as your principle residence for the required amount of time before selling. See examples 1 and 2.
1) You owned a rental house for 10 years. If you move into your rental house and live there for at least 2 years prior to its sale, you have created tax-free income. You must pay tax on any depreciation taken after May 6, 1997, but the rest of the gain is tax free up to the allowable limits.A home office may create a tax deduction, but it can also present a tax trap. If you use your home office for more than 3 of the 5 years prior to your home sale, the gain on the home office portion will be fully taxable. It may be possible to use a prorated portion of your $250,000 or $500,000 exception to have tax-free income on the capital gain portion of your office. You will have to recover the depreciation on your home office as income. This may still be a good move for you, please discuss it with your tax advisor.2) You purchased your first home in 1985. Your family grows and you move to a larger home. You decide to rent your old house. As long as it is not rented for more than 3 of the 5 years prior to its sale, you can still exclude the gain, up to the allowable limits. You must pay tax on any depreciation taken after May 6, 1997.
This is a terrific reason to consider a move. For your retirement or simply fulfill your dreams of larger to smaller or from city to country. Just tell me what you want, I will inspire your trust and understand your needs!
Your
Real Estate Professional,
Dale McNabb
Michigan
Association of Realtors March 2002
