If you sell your main home, you may be able to exclude up
to $250,000 of gain ($500,000 for married taxpayers filing
jointly) from your federal tax return. This exclusion is allowed
each time that you sell your main home, but generally no more
frequently than once every two years.
To be eligible for this exclusion, your home must have been
owned by you and used as your primary residence for a period
of at least two out of the last five years prior to its sale.
The two years may consist of 24 full months or 730 days. Short
absences, such as for a summer vacation, count as periods
of use. Longer breaks, such as a one-year sabbatical, do not.
You also must not have excluded gain on another home sold
during the two years before the current sale. Special rules
apply to members of the armed, uniformed and foreign services
and their families in calculating the 5-year period.
If you and your spouse file a joint return for the year of
the sale, you can exclude the gain if either of you qualify
for the exclusion. But both of you would have to meet the
use test to claim the $500,000 maximum amount.
If you do not meet the ownership and use tests, you may be
allowed to use a reduced maximum exclusion amount if you sold
your home due to health, a change in place of employment or
unforeseen circumstances. Unforeseen circumstances can include
divorce or a natural disaster resulting in a casualty to your
home, for example.
If you can exclude all the gain from the sale of your home,
you do not report any of that gain on your federal tax return.
If you cannot exclude all the gain from the sale of your home,
or you choose not to, use Form 1040's Schedule D, Capital
Gains or Losses, to report the total gain and claim the exclusion
you qualify for.