Real Estate Market

 
A major advantage of homeownership comes when you sell your home, since qualified sellers are allowed to keep tax-free profits up to $500,000 if you file a joint return, or $250,000 filing single. Gains above those limits are taxed at current capital gains rates, which vary depending on your tax bracket.

To qualify for the exclusion, you must have owned and used the property as your principal residence for any two of the five years prior to the sale. (The exclusion is prorated if you do not meet the "ownership and use tests" because of special circumstances such as health problems, job loss, etc.) In addition, you can take advantage of the exclusion as often as once every two years.

Gains From Rental/Second Home Use
The Housing and Economic Recovery Act of 2008 changed the treatment of capital gains from the sale of a home that the owners sometimes used as a principal residence -- and sometimes used as a second home or rental property. Gains attributable to use of the home as a second home or rental beginning January 1, 2009 will be taxed at capital gains rates, while gains attributable to the home’s use as a principal residence may be excluded up to the $500,000 or $250,000 limits (providing ownership and use tests are met).

To compute taxes owed on the gain, calculate a ratio using the number of days the property was a second home or rental ("non-qualified" use) as the numerator, and the total number of days the home was owned (from the original purchase date) as the denominator. Then multiply the fraction by the gain on the property.

For example, say in August 2009 you sell a home after owning it for four years (1,460 days) and using it as a rental property or second home (rather than principal residence) for three months in 2009 (say, 91 days). Your ratio would be 91/1460 or .062. If your capital gain on the property is $50,000, you would multiply that amount by .062 to find that $3,100 of your gain would be subject to capital gains taxation.

Help For Surviving Spouses
Until last year, when one spouse of a married couple died, tax law said the surviving spouse had to sell or exchange their jointly owned principal residence by the end of the same tax year in order to use the $500,000 limit for excluding capital gains. Otherwise, the exclusion would be limited to $250,000, as for a single taxpayer. New legislation has eased the requirement.

Now, for sales after December 31, 2007, surviving spouses may qualify for the $500,000 limit if the home is sold or exchanged within two years of the spouse's death and standard ownership and use tests are met.