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What do the federal tax rules have to say about home sales?

When most people buy a home, they have visions of staying there forever or, at the very least, staying put for the foreseeable future. While many people are able to realize this dream, others are forced to pull up stakes sooner than they wish thanks to everything from employment opportunities and the need for more space to divorce and illness.

As difficult as it can be to put a "For Sale" sign in the front yard, reluctant sellers can at least derive some comfort from the fact that they'll be able to sell for a profit in today's economy and, even better, know that this income won't be consumed by the federal government.

What do the federal tax rules have to say about taxes on gains realized from home sales?

The federal tax code dictates that married couples filing a joint return can exclude up to $500,000 of the profits realized on the sale of the primary residence and single people can exclude up to $250,000 of the profits realized on the sale of the primary residence.

Are there any qualifying conditions?

In order to qualify for the maximum exclusion, both married couples and single people alike must have owned the home and actually used it as their primary residence (i.e., main home) for a minimum of two of the five years preceding the date of the sale.

Do these two years -- or 24 months -- have to be consecutive?

It is not necessary for people to have both owned their home and used it as their primary residence for two consecutive years in order to qualify for the exclusion. Rather, the 24 months can fall anywhere within the five-year window.

Is this a limited opportunity?  

Somewhat surprisingly, the Internal Revenue Service allows people to claim the maximum home sale exclusion every time they sell their principal residence, provided it's not more than once every 24 months.

We'll continue this discussion in our next post, examining the circumstances in which people who don't meet these conditions can still qualify for a partial exclusion that is fairly generous.

If you have questions about deductions or encountered problems with the IRS over any claimed deductions, please consider speaking with an experienced legal professional who can outline your rights and explain your options.

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