Excluding the gain on the sale of a home is another major incentive for buying a home.
If you meet certain requirements, you can keep a significant portion of the profit of the sale of your principal residence without having to pay tax on the gain. Any gain is taxed as a capital gain so the amount owed is not as high. However, any losses on the sale of a principal residence are not deductible.
When you sell your principal residence, you can exclude from income up to $250,000 in gains ($500,000 if married filing jointly or a surviving spouse if the sale is within two years of the other spouse’s death). If you realize a gain on the sale greater than the exclusion, that amount is taxed at capital-gains rates.
To qualify, you must have owned and used your home as a principal residence for at least an aggregate of two of the five years preceding the sale.
The exclusion is available even if you took temporary absences, including vacations, or rented out the home while not living there.
Special rules are provided for sales of the home due to certain health issues, employment reasons or unforeseen circumstances, and for members of the uniformed services.
Keep in mind that if you took a First-time Homebuyer Credit, you may have to repay or recapture some or all of the loan/credit in 2011. Also, if you used your residence as a home office, you may need to make other adjustments.
