Capital Gain on Sale of Your Home
If you are a U.S. citizen who recently sold, or considering to sale, his home, this article is for you. Under the Israeli tax law, if you are an owner of a single residency in Israel, you might be exempt from capital gain tax in Israel. This might not be the case for U.S. tax, which means you might have a tax liability to the IRS for this sale. There are some requirements you have to meet in order to exclude this capital gain in your tax return.
Transfer of your home to a spouse or an ex-spouse
Generally, if you transferred your home (or share of a jointly owned home) to a spouse or ex-spouse as part of a divorce settlement, you are considered to have no gain or loss. You have nothing to report from the transfer. However, there is one exception to this rule. If your spouse or ex-spouse is a nonresident alien (non-U.S. citizen or resident), then you likely will have a gain or loss from the transfer and the tests described below apply.
Introduction on Qualifying for the Exclusion
The tax code recognizes the importance of home ownership by allowing you to exclude gain when you sell your main home. If you have a capital gain from the sale of your main home, you may qualify to exclude up to $250,000 of that gain from your income, or up to $500,000 of that gain if you file a joint return with your spouse. In general, to qualify for the exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
You must report the sale of the home even if the gain from the sale is excludable.
Exclusion applies only on to your principal residence
You may take the exclusion, whether maximum or partial, only on the sale of a home that is your principal residence, meaning your main home. An individual has only one main home at a time. If you own and live in just one home, then that property is your main home. If you own or live in more than one home, then you must apply a "facts and circumstances" test to determine which property is your main home.
Ownership Requirement
If you owned the home for at least 24 months (2 years) out of the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. For a married couple filing jointly, only one spouse has to meet the ownership requirement.
Residence Requirement
If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement. The 24 months of residence can fall anywhere within the 5-year period, and it doesn't have to be a single block of time. All that is required is a total of 24 months (730 days) of residence during the 5-year period. Unlike the ownership requirement, each spouse must meet the residence requirement individually for a married couple filing jointly to get the full exclusion.
Does Your Home Qualify for a Partial Exclusion of Gain?
If you don't meet the Eligibility Test, you may still qualify for a partial exclusion of gain. You can meet the requirements for a partial exclusion if the main reason for your home sale was a change in workplace location, a health issue, or an unforeseeable event. Contact us for additional information.
This reporting requires a significant amount of demonstrated knowledge and experience.
Contact us today for more specific consultation based on your personal information.