What is the Primary Residence Exclusion?

What is the Primary Residence Exclusion?

What is the Primary Residence Exclusion? There is a significant difference between the tax liability on the sale of investment property and the tax liability on the sale of a primary residence. The main reason for this difference is a capital gain exclusion/ exemption created by the Taxpayer Relief Act of 1997.

Before the 1997 Act, the tax laws provided a primary residence rollover provision that allowed a homeseller 18 months in which to reinvest the gains in another primary residence without triggering taxes.

There was also a one-time, over-55-years-of-age-$125,000 exemption designed to let aging Americans buy down to a smaller home without being taxed on the first $125,000 of profit. Both of these provisions became history when the Taxpayer Relief Act took effect on May 6, 1997.

The new primary residence or “main home” exclusion is basically a $250,000 exemption for individuals and $500,000 exemption for married couples when selling a primary residence. So long as the property qualifies, there are no more rollover, or reinvestment, requirements and no minimum age requirements; further the new exemption can be used as many times as one likes but not more frequently than once in a two-year period. The actual rule in IRS Publication 523 is as follows:

You can exclude the entire gain on the sale of your main home up to:
1. $250,000, or

2. $500,000 if all of the following are true.
a. You are married and file a joint return for the year.
b. Either you or your spouse meets the ownership test.
c. Both you and your spouse meet the use test.
d. During the two-year period ending on the date of sale, neither you nor your spouse excluded gain from the sale of another home.