Selling Your Personal Residence
The sale of your personal residence can result in some tax consequences depending on the cost of the home and what you sold it for. If you sell your home for more than what you bought it for then you will have a gain on sale. If you sell your home for less than what you bought it for then you will have a loss. A gain on sale may be excluded from taxation but a loss on sale cannot be deducted because it is considered a personal loss.
Excluding A Gain On Sale
If you sell your home at a gain you can exclude your gain but it is dependent upon your filing status. If your filing status is single and you sell your personal residence at a gain then you may exclude up to $250,000 in gain. If your filing status is married filing joint then you can exclude up to $500,000 in gain. The requirements to obtain this gain exclusion are that you have to own the home and live in the home for 2 out of a 5 year period. If you own and live in the home for less than two years or the time frame is less than five years then you would recognize the entire gain and it would be fully taxable. However, there are some exceptions to this general rule. One exception is that due to unforeseen circumstances such as health issues or a job transfer then you may exclude a partial gain.
Tax Planning Opportunity
Obviously the selling of your personal residence can provide a significant amount of tax savings. In addition, you can take advantage of this exclusion multiple times over your lifetime as long as you comply with the 2 out of 5 year rule. Because of this reason there are some tax planning opportunities. One tax planning strategy is if you own both a personal residence and a rental property you could possibly exclude a gain on the sale of both properties. How this would be accomplished is that you would sell your personal residence first and as long as you are fall within the 2 out of 5 year rule then you could exclude a significant portion of the gain. After selling your personal residence you could then move into your rental property and as long as you live in and own that home for 2 out of a 5 year period then you could sell that home and also exclude gain on the sale. This is an excellent tax planning opportunity for taxpayers that who own both a personal residence and own a rental property.