It used to be that once you reached the age of 55, you had the one time option of excluding up to $125,000 of gain on the sale of your primary residence. That rule changed in 1997.
Now, anyone, regardless of age, can exclude $250,000 of gain ($500,000 for a married couple filing jointly) on the sale of their home. You must meet the following IRS requirements.
- Owned the home for at least 2 years (the ownership test),
- Lived in the home as your main home for at least 2 years (the use test), and
- During the 2-year period ending on the date of sale, you did not exclude gain from the sale of another home.
You can use this capital gain exclusion over and over.
One couple I know used this tax exclusion to accumulate retirement assets. He was a home builder and every two years, he bought land and built the family a new home. As soon as they moved in to the new home, he would begin building the next one.
Although moving every two years is not for everyone, it did allow them to accumulate assets tax free. Every two years he would use some of the gain to build the next home, and deposit some into his investment account.
The downside: during times where real estate depreciates, this strategy won’t work. You could get stuck holding two homes for several years until the market recovers.
Gain over the excludable amount is taxed at the capital gains tax rate.
If you’ve owned the home less than one year, this rate will be the same as your ordinary income tax rate. If you’ve owned the home longer than one year, the capital gains tax rate will be lower than your ordinary income tax rate.
