Before You List: the 24 Month Test Behind the $250,000 and $500,000 Home Sale Exclusion

If you’re listing around Greater Boston this fall, check your dates before you set a price. The federal exclusion on the sale of a main home turns on how long you owned the place and how long you lived in it.

The two amounts

If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. The gain is the amount you realized, which is the selling price less your selling expenses, minus your basis, which is roughly what you paid plus the improvements you made.

The ownership and residence tests

To claim the exclusion you must have owned the home for at least 24 months out of the last 5 years leading up to the date of the sale, and used it as your residence for at least 24 months of that same period. The residence months can fall anywhere in the window and do not have to be a single block of time. For a married couple filing jointly, the $500,000 limit applies when both spouses meet the residence and look back requirements and one or both meet the ownership requirement. If only one spouse would qualify alone, the joint return falls back to what that spouse could exclude as a single filer.

The look back rule

Generally, you aren’t eligible for the exclusion if you excluded the gain from the sale of another home during the two year period before this sale, and Publication 523 carries the exceptions. Sellers who moved once already, took the exclusion, and are now selling a second property should check the closing date on the earlier sale before assuming anything.

Improvements raise your basis

Improvements that add to the value of your home, prolong its useful life, or adapt it to new uses get added to basis, which reduces the gain. Repairs and routine maintenance that don’t add value or prolong life do not, though repair-type work counts when it’s part of an extensive remodeling job. An added bathroom, a new roof, a heating system, a deck or a driveway all count, so it’s worth pulling those receipts before you list. One more thing if the place was ever a rental: depreciation allowed or allowable for periods after May 6, 1997 can’t be excluded, and time it wasn’t your main home after 2008 can carve into the exclusion.

Report it even when it’s excluded

If you receive an informational income reporting document such as a Form 1099-S, you must report the sale of the home even if the gain from the sale is excludable. Ask your closing attorney whether you’ll get one. Selling around Greater Boston this fall and unsure whether your months add up? Send me the date you closed on the place and the date you moved in, and we’ll lay it against the calendar before the listing goes live. This is general information and not tax advice, so run the result past a tax professional. Diana Kim, REALTOR®, eXp Realty.