By financen | October 15, 2007 - 5:55 am - Posted in Tax

If you are thinking about selling your house but are concerned about the capital gains tax you may have to pay on profit made from sale then there is some good news for you.

You might not have to pay any tax on the profit made if certain conditions are fulfilled. In the following sections we will look at how you can retain the total amount of profit made from sale of your house without having to pay any taxes.

When a person sells his house and makes a profit then this profit can be exempt from taxes up to the maximum exemption limit of $250,000 if:

  • He meets the use of house requirement and
  • The ownership requirement, and also
  • Had not used capital gains tax exemption in the last two years before the house is sold.

The exemption limit is $500,000 if:

  • The seller is married & files a joint return and
  • Both he and his spouse meet the use of house requirements and
  • Either he or his spouse meets the ownership requirement, and lastly
  • Neither he nor his spouse had used the exemption in the last 2 years before the house is sold.

Now let us look at what these, use of house and ownership requirements are.

To avail the exemption, during the five year period ending on the date house is sold a person must have –

  1. Lived in the house using it as his main house for at least two years and
  1. Owned the house for at least two years.

Let me add here that the two years of use & ownership during the five year period need not be continuous.

A person would meet the requirements if he can show that he owned & lived in the house using it as his main house for either twenty four full months or 730 days (365 x 2) during the five year period.

The exemption laws are somewhat different to accommodate the special needs of members of foreign services or uniformed services.

Members of foreign services or uniformed services can select to have the five year requirement period for use & ownership remain suspended during any period that such person or his spouse serves on qualified official extended duty.

It means that the person will be able to meet the two year use of house requirement even if, due to service requirements, he is not able to live in the house for the required two years during the five year period before the house is sold.

The suspension period cannot be more than ten years. Together, the five year requirement period & ten year suspension period can be as long as, but not more than fifteen years. In addition to it, the five year period cannot be suspended for more than 1 property at a time.

For applicability of this special rule, uniformed services & members of foreign services are defined as;

Uniformed services

  1. Commissioned corps of the Public Health Service.
  1. The Armed Forces (Army, Navy, Air Force, Coast Guard & Marine Corps) and
  1. Commissioned corps of National Oceanic & Atmospheric Administration.

Member of Foreign services

  1. An Ambassador at large.
  1. A Chief of mission.
  1. A Foreign Service officer.
  1. A member of Senior Foreign Service.
  1. Part of the Foreign Service personnel.

So by properly planning the house sale to keep note of how many years you have lived in it before it is sold & whether it was used as the main house for specified years, you can keep all of the profit made from sale without having to pay any tax on it.

This entry was posted on Monday, October 15th, 2007 at 5:55 am and is filed under Tax. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.


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  2. November 27, 2008 @ 5:42 pm

    I am selling my primary residence. I meet all requirements for the $250,000 exemption. After this is taken into account I will have a net capital gain of about 1,150,000. I will report no other income for the 2008 tax year. With this capital gain, will I be considered in the 35% tax bracket when figuring the capital gain tax? I assume so, but just want to check with an expert. Also, is there any way to defer capital gains on real estate besides a 1031 exchange? Thank You.

    Posted by Matt Haines
  3. November 6, 2010 @ 5:41 pm

    Thank you for this very informative article. I’ve been trying to find the definitive rule on what exactly the 5 year suspension means. We (dual military couple) bought a house in June 1996 for $289,900 and lived there until 2001. It has been a rental property since then, and it is now worth about $750,000. We assumed we had missed the deadline to sell and still qualify for the gains exemption (had thought the suspension meant 2 of the last 10 years), but based on the above article, it seems we have until June 2014 to still benefit from the capital gains tax exemption law for military personnel.

    Posted by Navy PAO