The Personal Residence Exemption is one of the most valuable tax provisions for US homeowners and yet remains one of the least understood. The Personal Residence Exemption allows a homeowner to exclude up to $250,000 of gain on the value of their personal residence from taxation when the home is sold at a gain. A married couple may combine their exemptions to exclude up to $500,000 from taxation.
Several criteria must be met in order to benefit from this generous tax provision. To start, an individual must have owned and lived in the home for two of the five years prior to when the home is sold. In many cases this is an easy standard to meet as most homeowners sell their home when they move to another. However, in some cases they may keep their prior home after moving in which case a three-year timeline begins and they have three years to sell the home and still meet the requirement to have lived in the home for two of the previous five years.
Another misconception is that a taxpayer may only claim the exemption once in their lifetime. In fact, a taxpayer may claim the exemption as long as they wait at least two years from their previous claim.
There are also a number of provisions that may allow a taxpayer to claim a partial exemption. If a homeowner does not meet the two out of the prior five-year holding period but is forced to move for work, health related reasons, an unforeseeable event such as their home being destroyed, a divorce or legal separation, financial distress due to job loss, or another factor beyond their control, they may benefit as well.