How to calculate taxable gain on the sale of a principle residence?
In order for the home to qualify as the principle residence, the taxpayer must meet the 2 out of 5 year test. Basically, this test assess whether or not the taxpayer lives in the home as the primary residence for 2 of the last 5 years leading up to the sale.
Assuming the taxpayer meets the 2 out of 5-year test, then the taxpayer is entitled to certain exclusion exemption amounts. If the taxpayer is single, up to $250,000 of the gain can be excluded. If the taxpayer is married, then up to $500,000 of the gain can be excluded.
For example, if Mary-Beth, a single paying taxpayer sold her principal residence in June of Year 7, for $1,000,000 after it significantly appreciated in value. She had purchased her home in January of Year 1, for $300,000. The realized gain would be $700,000 based on the sales price of $1,000,000 and a basis (original purchase price) of $30,0000. However, since Marybeth is “single”, she can exclude $250,000 of the gain, which brings the recognized gain to $450,000.
You might also be interested in...
What is the 2 out of 5 year test for a principle residence?
Taxpayers are entitled to an exemption on taxable gains if the home meets the principle residence test. In order for the home to qualify as the principle residence, the taxpayer must meet the 2 out of 5 year test. Basically, this test assess whether or not the taxpayer lives in the home as the primary […]
What amount of gain on sale of home is exempt?
When a taxpayer sells their home, they would have a realized gain based on the difference between the price they paid and they price they sold it for. Assuming that the home qualifies as the principal residence and meets the 2 out of 5 year test, a portion of the gain is tax exempt. The […]