Getting the Best Tax Rate When Selling Your Primary Residence

When you sell your primary residence you may be able to save thousands of dollars by taking advantage of one of the best available tax breaks.  Did you know that a married couple can qualify for the entire $500,000 exclusion even if only one spouse has owned the property for two years?  Or that you can convert a primary residence to a rental in order to defer any gain that isn’t excluded?  Read on for a few pointers that may help you take advantage of this tax benefit when you sell your primary residence. 


Primary Residence Exclusion


The primary residence exclusion allows taxpayers to exclude up to $250,000 of gain ($500,000 for married couples filing jointly) when selling their primary residence, provided that they have owned it and lived in it as a primary residence at least two of the past five years.  This tax benefit can be used once every two years. 


$500,000 Exclusion for Married Couple


If you are married and you and your spouse file a joint return, you can exclude up to $500,000 of gain under this rule, provided that:


  • Either you or your spouse has owned the home at least two of the past five years;
  • Both you and your spouse have used the home as your primary residence at least two of the past five years; and
  • During the two year period prior to the sale, neither you nor your spouse excluded gain from the sale of another home.


If both spouses don’t qualify under these rules, the maximum tax exclusion is based on what they qualify for individually, but each spouse is treated as owning the property during the period that either spouse has owned it. 


Using Your Home for Personal and Business Use


Sometimes a property can be used partly as your primary residence and partly for business or as a rental.  This may happen when you have an office in your home or own a duplex in which you live in one unit and rent the other unit.  This can also occur when you change the use of the property from business to personal or vice versa.  A few points to remember:


  • If you acquire property in a 1031 exchange and then move into it as your primary residence, you must own it for five years before you can exclude any gain from a sale of the home.  In addition, you will not be able to exclude the gain attributed to the years that you used the property for your business or as a rental. 
  • If you move out of your primary residence and rent it for a couple of years before you sell it, you will be able to exclude gain using the primary residence exclusion and defer any excess gain by doing a 1031 exchange into another property. 


One of the best tax benefits widely available to homeowners is the exclusion of gain upon the sale of your primary residence.  We encourage you to discuss this with your tax advisor and call us to open an exchange.