Money Girl answers 3 FAQs about real estate to help you succeed whether you're a buyer, seller, or investor—or even if you just plan to become one someday.
Rule #1: You must pass an ownership and use test
You must have owned and lived in your home for at least two out of the five years prior to a home sale. For instance, you could live in a home for two years, rent it out for three years, and then sell it and take the gains exclusion. Theoretically, you could reap a tax-free gain every two years if you were willing to sell, buy, and relocate that often.
As long as you can claim residency for any two of the previous five years before you sell a home, you’re eligible for the gains tax exclusion. There are even some legal exceptions if you have to sell before two years, including having to move for a new job, divorce, heath reasons, military service, or unforeseen circumstances.
Rule #2: There is an exclusion limit
You can exclude up to $250,000 of a home sale gain or up to $500,000 if you’re married and file a joint tax return. Again, these limits apply to every home you sell, with no limit during your lifetime.
Rule #3: Exclusions apply only to main homes
If you own more than one home, you can exclude the gain on the sale of your main residence only. Your main home is the one you live in most of the year.
Rule #4: Gains above the exclusion are taxable
Any gain you make that exceeds the exclusion amount is taxable and must be reported on Form 1040, Schedule D, Capital Gains and Losses.
Rule #5: Home losses are not deductible
If you sell your main home for a loss, it cannot be deducted from your taxable income.
For complete information, refer to IRS Publication 523, Selling Your Home. It includes worksheets to help you figure the amount of gain you’re eligible to exclude from tax. If you’re still unclear about your situation, be sure to consult with a tax professional.
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Mistakes First-Time Homebuyers Should Avoid
Real Estate Question #2: Tom T. asks, “I want to start gathering information about buying a house. Do you have any real estate advice or podcast episodes geared toward millennials?”
Answer: I’ve written many articles and done several podcasts to help first-time buyers successfully navigate a real estate purchase. Here are some shows I recommend:
- What Every First-Time Home Buyer Should Know
- How to Buy a Home in 10 Steps, Part 1
- How to Buy a Home in 10 Steps, Part 2
Since there’s a lot to know about buying a home, I’m going to cover three common mistakes that first-time homebuyers should avoid: