Two and a half years ago, my husband and I moved from a home we had owned and lived in for 10 years. At that time, we bought a new house and have been renting out the old one. Will we have to pay capital gains if we sell the old house? --A Reader
Dear Reader, Great question -- and good you're asking it now. That's because, while there are generous exclusions allowed when it comes to capital gains on the sale of a home, timing is crucial, and the clock is ticking.
Under current laws, if you sell your principal home and make a profit, you can exclude $250,000 of that profit from your taxable income. And that's just the exclusion for an individual. Married couples can exclude up to $500,000 (if (set ital) both (end ital) spouses each meet the ownership and use tests below). So, depending on how much of a profit you make on the sale, you and your husband could potentially have no capital gains tax bill at all.
I say "potentially" because in order to claim the maximum exclusion, you have to pass what the IRS calls the ownership and use tests. This means
--You have to have owned the house for two years.
--You have to have lived in the house as your principal residence for two out of the last five years, ending on the date of the sale.
There are a few exceptions to these rules -- for example, if you had to move before owning the home for two years because of a job change or because you experienced what the IRS designates as an "unforeseen circumstance," such as a divorce or natural disaster. In these situations, the IRS will allow you to prorate the exclusion.
And interestingly, the two years residency doesn't have to be consecutive -- you just have to have lived in your home for a total of 24 months out of the five years prior to the sale.
It sounds like you easily pass the ownership test. However, since you've been out of your prior home for two and a half years, you have only six months left to meet the residency requirement. So there's no time to lose. Here's what I suggest to help you determine your potential taxes and maximize your exclusion.
Calculate your cost basis
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