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Capital Gains Exemption

Capital Gaines Exemption

The Capital Gains Exemption, also commonly known as the home owner’s exemption, was created by Congress passing the Taxpayer Relief Act of 1997. The Bill added Internal Revenue Code 121 Principal Residence Sale Tax Exemption.

The only thing you need to qualify is: the home owner(s) must have owned and occupied the property as their principal residence an “aggregate” two of the last five years before its sale. Many home owners erroneously think they must have owned their homes at least five years before qualifying for this great tax break- that’s incorrect. You can qualify for the exemption two years after your purchase if you moved in immediately. You can use the capital gains exemption once every two years.

If you owned and occupied your primary residence immediately for two years you qualify for the exemption. In theory, you could rent your home to tenants for up to three years afterwards before losing your principal residence sale exemption eligibility.

For a single person the Capital Gains Exemption is up to $250,000. For a married couple, only one spouse need hold title, but to qualify for the $500,000 break both spouses must meet the two-year occupancy test. If two individuals, not married to each other, own a home together, they must each meet the two out of last five years ownership and occupancy tests.

Capital gains tax is 20%, if you held your investment for less than a year the Capital Gain is taxed at your income tax rate because investments held less than one year are considered short term investments.

Read more: Capital gains home-sale tax break a boon for owners