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Don’t meet the IRS’s ownership and use requirements to exclude some or all of the gain from your home sale on your income taxes? You may still qualify.
Members of the military, married couples, widows / widowers and those won’t don’t meet the ownership and use requirements for the home sale tax exemption may still qualify—at least partially—thanks to special circumstances and rules provided by the IRS.
Ownership and use requirements
Homeowners who realize a gain (profit) from the sale of their home may qualify to exclude part or all of that gain from their income taxes. Individuals can exclude up to $250,000 in gain and married couples filing jointly can exclude up to $500,000 in gain.
To qualify, homeowners must have owned their home for at least two years (ownership test) and lived in the home as their primary residence for at least two years (use test) of the past five years before selling.
There are special considerations and rules, however, for military members, widows / widowers, married couples and those who don’t meet the ownership and use requirements.
Military members
A law change in 2003 exempts military personnel from the two-year use requirement (for up to 10 years). This means they can qualify for the full tax exclusion whenever they must move to fulfill military service requirements
Widows / widowers
Homeowners selling after a spouse dies face special circumstances. A law passed in 2008 enables unmarried widows or widowers to stay in their home for up to two years after the spouse’s death. If the surviving spouse sells the home within that two-year window and both spouses met the ownership and use requirements at the time of death, then no taxes are owed for gain received up to $500,000.
Married couples
Only one spouse must meet the ownership requirement, but both must meet the use test. If one spouse bought the residence three years ago and then married one year ago, then the ownership test is met. But if the new spouse didn’t move in until after the wedding, then the use test hasn’t been met. (However, if the new spouse lived in the residence for a year prior to the wedding, then the use test is met.)
In addition, if the new spouse already used the home sale tax exemption in the past two years, then neither spouse can claim the exemption until two years have passed since that sale date.
Partial exclusion possible
If you have to sell your home before you meet the ownership and use tests, you may still be able to claim partial tax exclusion—if you must move due to these circumstances:
- Do you owe taxes on your home sale?
- Change in employment, where the new job is at least 50 miles farther from your current home
- Change in health, where a doctor recommends a change in residence for treatment, or to provide medical or personal health care for a qualified individual suffering from a disease, illness or injury
- Unforeseen circumstances, which you could not have anticipate prior to purchasing your home, such as an involuntary conversion of your home, natural or man-made disasters resulting in casualty to your home, a change in employment or self-employment status the affects your ability to pay basic living expenses, and more
For a full listing and description of exemptions to the ownership and use test, view IRS Publication 523.
This article contains general information. Individual financial situations are unique; please, consult your financial advisor or tax attorney before utilizing any of the information contained in this article.
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