Understand the rules now to avoid a tax surprise later
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There is large tax break that allows you to exclude up to $250,000 ($500,000 married) in capital gains on the sale of your personal residence. But making the assumption that this gain exclusion will always keep you safe from tax can be a big mistake. Here is what you need to know:
To qualify for the capital gain tax exclusion when you sell your home, you need to pass three hurdles:
It's your main home. It can be a traditional home, a condo, a houseboat, or mobile home. Main home also means the place of primary residence when you own two or more homes.
You pass the ownership test. You must own your home during two of the past five years.
You pass the residency test. You must live in the home for two of the past five years.
In addition, there are some additional quirks to know, including:
You can pass the ownership test and the residence test at different times.
You may only use the home gain exclusion once every two years.
You and your spouse can be treated jointly OR separately depending on the circumstances.
When to pay attention
You have been in your home for a long time. The longer you live in your home the more likely you will have a large capital gain. Long-time homeowners should check to see if they have a capital gains tax problem prior to selling their home. Accounting Edge