Gain Exclusion on Sale of Personal Residence

Published on Tuesday, July 23, 2019

Thinking about selling your primary residence?

With the rise in real estate prices, many taxpayers may be looking to sell their primary residence and cash in on the gain. If this has been your principal residence and you have owned it for a period of at least two out of the last five years, you can exclude a nice portion of the gain. Single taxpayers or those married filing separately can exclude up to $250,000. Married filing joint get up to $500,000. The other stipulation is that you are only allowed the gain exclusion once every two years. If you find yourself not quite meeting all of these conditions, you may still qualify for a partial exclusion if you have a good reason. The IRS has established some standard excuses, which include: a change in place of employment or health issues that require a move. There is also a third category that is more of a catch all known as unforeseen circumstances.

Employment. To meet the change in employment test, the sale has to be due to a change in the location of employment. The safe harbor for employment is based on distance: the new place of employment must be at least 50 miles farther than the prior commute. So, for instance, if your prior commute was 5 miles, your new work location must be at least 55 miles from your old residence. The change in place of employment also has to have occurred while the taxpayer owns and is using the property as a primary residence. If there was no former place of employment, the distance must be at least 50 miles from the new place of employment and the old residence.

Health. The health reason test is met if the primary reason for the sale is to obtain, provide, or facilitate the diagnosis, cure, mitigation or treatment of a disease, illness, or injury to a qualified individual. Qualified individuals not only include the taxpayer and spouses, but also family members and just about every relative. The safe harbor is not met if the sale of the residence is merely to benefit the general health or wellbeing of an individual (unless you have a doctor’s note).

Unforeseen circumstances. Unforeseen circumstances are defined as an event that the taxpayer could not reasonably have anticipated before purchasing and occupying the residence. The specific safe harbor events that have been provided by the IRS include: involuntary conversion of the residence, disasters or acts of war or terrorism resulting in damage to the residence, death of a qualified individual, unemployment or change in employment status where you are unable to pay the mortgage, divorce or legal separation, or a multiple birth. Now these are certainly not all of the common life events that can qualify as unforeseen that result in the sale of a home. Others might include marriage, adoption, caring for a disabled parent, certain job circumstances or even some environmental factors.

Other than what is required to meet the safe harbor tests, there are many different facts and circumstances that can qualify for the partial exclusion. We definitely recommend always keeping track of all improvement costs, as it will help increase the basis and lower the gain. Feel free to contact us and let us help you determine if your fact pattern has what is necessary to qualify for a partial exclusion.

Greg Stalling, CPA