Most real estate sales involve the selling of personal residences. The question of whether the profit on the sale is taxable often not only comes up to me as a tax professional, but I also find that Realtors get that question as well from potential sellers. Today, we’ll touch on the general rules of the topic. My goal isn’t to make you a tax expert, but to allow you to give some general guidance to your clients. For specific questions, I’d recommend that you send them to a tax professional that you work with.
What Are the Rules?
There are three Basic rules for the Exclusion of Income on a Sale of a Principal Residence:
- Only one principal residence is permitted at any one time,
- The property must have been the taxpayer’s principal residence for 2 of the last 5 years, and
- The Exclusion is $500,000 for married persons filing jointly and $250,000 for all other filers.
What If I own more than one Home?
What if I own a 2nd Home or have a Rental Property? See above for what qualifies today. Unless it is your “Principal Residence” and you’ve lived in the house for 2 of the last 5 years, it doesn’t qualify. However, you can utilize the exclusion more than one time. Let’s take a look at how you can use these rules to your benefit.
Let’s say I own my residence and an investment property, and plan on retiring and moving in 3 years to another home and/or location. There’s nothing to stop me from selling my qualifying residence today, using the exclusion, and then moving into my investment property for two years, and selling that property with another qualifying exclusion. You can do something similar with a 2nd home or a home office that might normally be taxable. By planning, your client can legitimately save a substantial amount of money on their taxes, and have that money in retirement, and you can be their hero.
Need a Tax Professional to Team up With?
If you are a Realtor, or other Small Business owner, who needs professional help with your taxes, keeping your books properly, or dealing with any IRS issues, give me a call at (972) 821-1991 or send me an email at bob@jablonskytaxrelief.com. Learn more about us at https://jablonskytaxrelief.com/real-estate/
