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March 29, 2013

Tax Breaks for Older Adults: Excluding the Gain from Home Sale

As years pass, homes that once seemed too cramped to hold the entire family slowly begin to empty and quiet down. This is just one reason many older adults opt to sell their homes in favor of downsizing to smaller condos or joining campus-based retirement living communities

If you lived in your home for many years before selling, it’'s likely you had substantial equity, earning a large profit on the sale. But now that your moving boxes are unpacked and tax season is upon us, you’re wondering: Should I exclude the gain from the sale of my home from my income? 

According to IRS Publication 554, you can generally exclude up to $250,000 ($500,000 on a joint return in most cases) of the gain on the sale of your main home. To claim the exclusion, during the five-year period ending on the date of sale, you must have: 

  • Owned the home for at least two years (the ownership test)
  • Lived in the home as your main home for at least two years (the use test)
  • During the two-year period ending on the date of the sale, you did not exclude gain from the sale of another home 

Generally, if you can exclude all of the gain, you do not need to report the sale on your tax return unless you receive a form 1099-S from your real estate broker. 

If your spouse passed away and you did not remarry before the date of sale of your main home, you are considered to have owned and lived in the property as your main home during the period of time when your spouse owned and lived in it as a main home. You may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home if you meet all of the following requirements: 

  • The sale or exchange took place no more than two years after the date of death of your spouse
  • You have not remarried
  • You and your late spouse met the use and ownership tests at the time of your spouse’'s death
  • Neither you nor your late spouse excluded gain from the sale of another home during the last two years 

Do not report the sale of your main home on your tax return unless you have a gain and you do not qualify to exclude all of it, you have a gain and you choose not to include it, or you have a loss and you received Form 1099-S. If you have any taxable gain on the sale of your main home that cannot be excluded, report the entire gain on Schedule D (Form 1040). 

Want to learn more about the potential benefits for taxpayers 65+? Download our FREE guide “Tax Relief for Older Adults: A Basic Guide to Benefits” before you file this year!


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