Tax Exemption on Home Sale Gains: FAQs

Whether large or small, tax exemptions are a welcomed relief for taxpayers. Ironically, many people are either unable or unaware of the tax exemptions that may apply to them, and miss the chance to take advantage of these savings. In this blog post, we’ll answer some of the most commonly asked questions about one benefit in particular: home sale gains. Let’s look at the tax exemption gains driven by the sale of a house.

1. What are the requirements?

To be eligible for a partial or full tax exemption on the gains from the sale of your home, you must have lived in the property for a minimum of 2 years, with the total ownership of no less than 5 years. In addition, it is worth mentioning that the tax exemption is applicable only if the property sold is the seller’s main home.

2. Are there any exceptions?

The eligibility rules are slightly different for military personnel, people with a disability, and those who work with the Peace Corps or the US Government, as uniformed, intelligence personnel. For instance, if someone has a disability and are unable to care for themselves, they would need to stay in the property for 12 months to meet the residence requirements.

3. What is the maximum exclusion limit?

According to Section 121, (of what code?? )the maximum gain amount that can be exempted from tax payment is $250,000 for individual taxpayers and $500,000 for married couples filing jointly. Therefore, Net Investment Income Tax will not apply to the amount that is exempted as per the criterion mentioned. This section is confusing, can it be simplified or further explained?

4. When to report a sale?

If the gain from the sale of your home is not taxable, you may not have to report the sale on your tax return. If, however, you can’t exclude a part or all of the gain, it must be reported. Similarly, you must report the sale when you receive Form 1099-S (used to report the sale or exchange of a real estate asset).

5. What is the exclusion frequency limit?

Though exceptions may apply to this rule, in most cases, the gain from the sale of your main home may be excluded from tax returns only once every 2 years.

6. How many homes qualify for exemption?

Only the gains from the sale of your main house qualify for a tax exemption. If you own more than one residential property and use all of them, your main home would be considered the one in which you spend most of your time.

7. When to pay back credits and subsidies?

If you receive any federal mortgage subsidies or homebuyer credits, you are supposed to pay back some or part of the amount received in tax exemption. Reword this sentence? Doesn’t flow. To learn how much of the first-time homebuyer credits you are supposed to pay back or if your case falls under any exception, see Form 5405 (Repayment of the First-Time Homebuyer Credit). Fact checking this.

A Few Last Words

If you have recently changed your house or are planning to, do not forget to update your address with the IRS, once you have moved to the new address. To update your address, you need to fill Form 8822. The address where you need to send the form is mentioned on page 2 under form’s instructions.

Tax Exemption on Home Sale Gains: FAQs
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