Tax “Exclusions” are written in the tax code to allow homeowners, when selling their principal residences, to completely avoid federal or state income taxes on substantial amounts of their profits. The maximum profit exclusions for married couples who file joint tax returns is $500,000, while single filers can claim $250,000 and couples who file separate returns are subject to $250,000.

Contrary what many sellers think, the exclusions can be used repeatedly. They can make use of the exclusions at least twice per year.

The law states that sellers are exempt from capital gains taxes if they meets two requirements: 

House Money

  1. They have lived in and owned the property as her main residence or principal home for at most two years during the five-year period ending with the date on which the sale is made.
  2. They could not have excluded the gain from the sale and purchase of another principal home within the two years prior to the sale date.

There is also additional benefits as the two years do not have to be consecutive. The years can be separated and continued for a total two years.

What about vacations or other seasonal absences that are short and temporary? The IRS doesn’t mind. Sellers can consider them periods of owner usage. This is true even if they rents the property during the absences.

The IRS doesn’t restrict exclusions to single-family homes. Homeowners principal residence can be any one of the following:

  • A condominium.
  • Cooperative apartment
  • Her section of a multiunit apartment building.
  • A house trailer.
  • A mobile home.
  • A houseboat/yacht that offers facilities for cooking, sleeping, sanitation and other amenities.
  • After retirement, she will move in to a vacation getaway.

Another plus? It doesn’t even matter where they live. It can be anywhere in the world!

Partial profit exclusions. Imagine selling a house within the last two years. Or failing to fulfill the ownership or use requirements. All is not lost. You may be eligible to receive a partial exemption.

Primary causes for sales. Sellers can only take advantage of the IRS’ reduced exclusions if they are due to: Health problems, changes in employment or unforeseen circumstances. These could include divorces or legal separations and natural or man-made disasters that result in residential damage such as floods.

Take for example: Jamie is single. She has lived in her residence for just 12 months. Then she moved to a job in another area. She can exclude a gain up to $125,000. This is based on her 12-month-old dwelling divided by 24 month, or 50% of her $250,000 maximum exclusion.

The bottom line: Don’t make assumptions about how much you might be allowed to deduct. Talk to a tax professional if you want to be sure that you have all the entitlements!