If you’ve owned your home on the beach for a while, you may have a large gain when you sell. Federal tax law lets many homeowners keep a big part of that gain tax free. Here is how the home sale exclusion works, in plain English, and what it doesn’t cover.
Key takeaways
- You may exclude up to $250,000 of gain, or $500,000 for most married couples filing jointly, on the sale of your main home.
- You generally must have owned and lived in the home as your main home for at least 2 of the 5 years before the sale.
- Second homes and rentals generally don’t qualify for this exclusion.
- Florida has no state personal income tax, so the federal rules are the ones that matter for most sellers here.
The ownership and use tests
The 2 years don’t have to be continuous. The IRS explains the tests, and exceptions for things like job moves and health reasons, in Publication 523.
How the gain is figured
| Step | What it includes |
|---|---|
| Sale price | What the buyer paid |
| Minus selling costs | Commission, doc stamps, title and other closing costs |
| Minus your basis | What you paid, plus certain purchase costs and improvements |
| Equals your gain | The amount the exclusion can cover |
Our tip: Keep receipts for improvements like a new roof, impact windows or a kitchen remodel. They can add to your basis and lower your gain.
When it doesn’t apply
- Second homes and vacation rentals you didn’t live in as your main home.
- Gain over the limit, which may be taxed as a capital gain.
- Depreciation claimed for renting or business use after May 6, 1997, which can’t be excluded.
- Investment property, where a 1031 exchange may be worth asking your tax adviser about.
What this means for you
- Check your dates of ownership and use before you list.
- Gather closing statements from your purchase and receipts for improvements.
- Talk to a tax adviser before you sign a listing agreement if your gain may exceed the limit.
- Estimate your selling costs with our guide to the cost of selling.
Please note: Laws, tax rules and insurance terms change, so check the details for your situation with a licensed professional, such as a Florida real estate attorney, insurance agent or tax adviser, before you act.
Thinking about selling? Start with our home value estimator, read our seller’s guide, or contact us.