Understanding the Primary Home Tax Exclusion
One question I hear from many pre-retirees planning to move after retirement is what the taxes will be when they sell their home. Many have lived in the home for 10, 20, or even 30+ years and are sitting on a substantial gain. Fortunately, the answer is often that there will be little to no taxes due to the primary home tax exclusion.
This provision in the U.S. tax code allows homeowners to exclude a portion of the capital gains from the sale of their primary residence from their taxable income.
Qualifying for the Exclusion:
Ownership and Use: You must have owned and used the home as your primary residence for at least two of the five years preceding the sale.
Frequency Limitation: The exclusion can generally be claimed once every two years.
Capital Gains Limit: For single filers, up to $250,000 of capital gains can be excluded from taxable income. For married couples filing jointly, the exclusion doubles to $500,000.
*Widows who sell the home within 2 years of the date of death typically qualify for the full $500,000 exclusion.
Example
A married couple bought a home for $220,000 in 1991. Over the years, they spent $70,000 on capital improvements. They sold the home for $830,000 (net after fees) in 2024.
$830,000 sale price - $220,000 original price - $70,000 improvements - $500,000 exclusion = $40,000 realized capital gain.
Key tips:
1. Document Home Improvements: Keep thorough records of any improvements made to your home. Certain home improvements, such as renovations or additions, can increase your home’s basis, thereby reducing potential capital gains.
2. Widow provisions: If you are a widow, consider the time restraint of 2 years to maximize the full gain. In addition, you may also qualify for a partial step up in basis due to the death of your spouse.
I recently had a client who had over a $500,000 gain from the original purchase price but, because of the partial step-up in basis, owed no taxes.
3. Understand State Taxes: The primary home exclusion is a federal provision. State taxes are not included in this rule.
The primary home exclusion offers valuable tax benefits to homeowners, allowing them to exclude a significant portion of capital gains from the sale of their primary residence. By understanding the eligibility requirements and implementing strategic planning, homeowners can maximize their tax savings and take advantage of this provision!
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.