Primary Home Tax Exclusion

Married couples filing jointly can exclude up to $500,000 of net profit on the sale

of a primary home from taxes. For single filers, the exemption is $250,000.

For example, say that a married couple bought a home many years ago for

$100,000 and later made $100,000 of improvements. This year, they sell the home

for $600,000. The gain, or profit, on the sale is $400,000. All of it would be exempt from capital gains tax due to their $500,000 exemption.

To be eligible for this benefit, the homeowner typically must have used the house

as a primary residence for two of the previous five years. In general, taxpayers

aren’t eligible for the full exemption if they excluded the gain from the sale of

another home during the two years before the sale.

Surviving widows and widowers have until two years after the spouse’s date of

death to sell and qualify for the $500,000 exemption rather than a $250,000

benefit, as long as the survivor hasn’t remarried. The survivor will also likely get

a “step-up” in cost basis on half of the home’s value (in most states) or all of the

home’s value (in community-property states). This will lower capital-gains taxes

on the home sale, if any are owed.