By Garrett Sutton, Esq.

One of the greatest tax gifts is the principal residence rule for capital gains on the sale of your home.  So great is the principal residence tax exclusion that even married couples filing jointly are benefited to the same, if not greater, extent as single taxpayers.

Now, some people may argue that there have been, are and will be greater gifts, but not much beats the simplicity of the rule. The basics of it are immediately easy to grasp: you own a house, you live in it for at least two years out of five, you sell it and you don’t have to pay any taxes on the first $500,000 in gain.  Gone are the days when the young homeowner (not wishing to sell and upgrade) had to save every receipt for every upgrade, every repair, and every minor item bought at the hardware store.  If you have lived in your own home for two years you probably don’t have to worry.

The Basics of the Rule: you own a house, you live in it for at least two years out of five, you sell it and you don’t have to pay any taxes on the first $500,000 in gain.

Of course, there are some technical points associated with the general rule.  They are pretty simple so first let’s bullet-point the main ones:

  • If you are single your capital gains exclusion is limited to $250,000.00.
  • If you are married your capital gains exclusion is limited to $500,000.00.
  • You have to own the home and it has to be your “primary residence” for two of the previous five years.

What is a Primary Residence?

What is your “primary residence?”  Basically, it is a home that you personally live in the majority of the year.  If you have a house in Palm Beach and one in Lake Tahoe and you spend 8 months of the year at the Tahoe home then that is your primary residence.  But, keep in mind the two year out of five year part of the rule.  Let’s say that the next year you spend 7 months at the Palm Beach house.  Then the Palm Beach home is your primary that year.  Do you see where this is headed? You can primary more than one home at once over a five year period so long as each is your main home for at least two years during that five year period.  Temporary absences are also counted as periods of use – even if you rent the property during those absences.

Be sure to work with your accountant in this area. Rules and regulations do change and you want to go into it with the most up to date understandings. For more information on capital gains issues, please read my book Loopholes of Real Estate.