Generally, taxpayer may exclude up to $250,000 ($500,000 for married couples filing a joint return) of gain from gross income on the sale or exchange of their principal residence. This exclusion applies if the taxpayer has owned and used the property as a principal residence for periods aggregating two years or more during the five years immediately preceding the sale or exchange of the residence. The exclusion applies to only one sale of a principal residence in any two-year period. The two-year ownership and use periods do not have to be concurrent for the exclusion to apply
When Does the Gain Exclusion on Sale of Property Apply?
The exclusion does not apply to certain sales of a principal residence acquired in a like-kind exchange. It generally is available only to individuals but, under certain circumstances, a bankruptcy estate or grantor trust may use the exclusion. The gain from the sale of a partial interest in a principal residence also may be excluded.
Generally, the exclusion is available only for the portion of the property that is used as a principal residence. The exclusion does not apply to gain allocable to any portion of the property that is not used as a principal residence if that portion of the property is separate from the dwelling unit. No allocation is required, however, if both the residential and non-residential portions of the property are within the same dwelling unit.
When the exclusion does not apply, any gain realized on the sale of the residence is capital gain income, which is taxed at reduced rates. Any loss realized on the sale of the residence is not deductible.
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