Last spring, the Internal Revenue code was changed so that every person who owns his residence can qualify for tax free profit. This change allows homeowners to accept a profit of up to $250,000 each whenever they sell their property as long as they meet a few qualifications. This change in the Internal Revenue Code benefits everyone who owns their home and makes it easy for us all to figure out the tax consequences prior to closing.

Prior to this change each homeowner was faced with paying taxes on any profit they received from the sale of their residence unless they qualified under two limited catagories. One choice was that the tax could be deferred by buying and occupying a replacement residence for an equal or greater price than the residence sold within two years before or after the sale. The other alternative was even more restrictive. To qualify, a homeowner had to be 55 years or older and to have occupied the residence for at least three of the five years prior to the sale. And if they qualified under this catagory, they were only allowed a one-time exclusion of $125,000 as either a single or married entity. 

In comparison, the new rules are much more advantageous. Under the new rules every individual, whether married or single, can exclude up to $250,000 profit on the sale of a residence. In other words, a married couple can take up to $500,000 as long as they file a joint return. Also in comparison is the ease in which qualification for this tax exclusion can occur. The largest requirement is that the individual who owns a principle residence in whole or in part has occupied the property for at least two of the five years before the sale. The two years do not have to be in consecutive order ,or the most current. All they have to be is within the five years preceeding the sale. 

There is no "marital taint" or age restriction as existed with the previous exclusion requirements. The only other restriction is that this exclusion can only occur every two years. Although most homeowners do not have anywhere near $250,000 profit per person in their home, all homeowners will benefit because whatever the profit they will not have to face a tax consequence. 

As a matter of fact, even those homeowners who must sell their property due to unusual circumstances prior to the two year restriction will qualify for a pro-rata deduction of their profit. Unusual circumstances include sale due to job transfer or family illness. Those who will benefit the most from this new tax law are those who in the past could not sell theri property without a substantial tax consequence. Many of these were seniors who because their property had appreciated so greatly could literally not afford to sell. Some had already taken their 55 years or older exclusion and even though they wanted to move into smaller and/or more modest accommodations, their tax consequences prohibited it. This new law frees them from captivity and actually allows them to use some of the profits for their retirement. As with all tax planning, those involved should consult tax professionals to clarify the details in light of their own unique situation. However, this new tax code in many ways enhances the many benefits of home ownership.