Couples are eligible for tax exemption of up to $500,000 in sale of home


October 09, 2005

We are a married couple, and both of us are planning to retire in a few years. We owned our first home for seven years. The purchase price was $14,000; we sold it for $21,000. We then purchased our current home, which was fully paid for about two years ago. We have not and do not plan to take any of the equity out of the house. The value has gone from a purchase price of $31,500 to approximately $275,000 currently. When we retire (myself at age 62 and my husband at full age) we plan to sell our current home in Maryland and purchase a retirement home in Oklahoma, where our daughter has relocated, for about $150,000. This will probably end up being our final home. Our question is, since we will be investing only about half of the profit from our home, will we be subject to paying capital gains taxes? If yes, what can we do to protect our retirement nest egg?

Most folks can sell their home without paying capital gains tax. If you have lived in your home for two out of the past five years, the first $500,000 gain (for married couples) is tax exempt. (For singles, it's $250,000.)

The "two-out-of-five" year period ends on the date the residence is sold.

Folks who live in the home for less than two years may have to pay tax on the profit unless they:

Moved to take a new position that is at least 50 miles farther away from their old job.

Moved for their health or the health of relatives in their care.

Meet the "unforeseen circumstances" test under IRS regulations, such as the death of a spouse, divorce and other specific reasons.

Since you purchased your home for $31,500 and have lived in it for more than two years, you can sell it for up to $531,500 tax free.

You should consider buying your retirement home now and renting it out for a few years until you are ready to move. You will avoid the risk of further price increases for your retirement home, and you will still be eligible for the gain exclusion on the sale of your home in Maryland.

To read more about the tax rules for excluding gains on home sales, check IRS Publication 523.

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