If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly.
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, except when your ex-spouse is a nonresident alien.
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 or live in more than one home, then you must apply a "facts and circumstances" test to determine which property is your main home.
To receive the maximum exclusion of gain, your home must pass the Eligibility Test, which is a several step process:
1. Automatic disqualification
2. Ownership Requirement
5. Exceptions to the Eligibility Test
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.
Figuring Gain or Loss.
The formular to determine the gain or loss is simple:
Selling price −Selling expenses = Amount realized −Adjusted basis = (+)Gain or (-) Loss.
Certain events during your ownership, such as use of your home for business purposes or your making improvements to it, can affect your gain or loss.
Figuring out Basis Adjustments is much more complicated. You should include many, but not all, costs associated with the purchase and maintenance of your home in the basis of your home.
If you received your home as a gift, you should keep records of the date you received it. Record the adjusted basis of the donor at the time of the gift and the fair market value of the home at the time of the gift. Also ask if the donor paid any gift tax. As a general rule, you will use the donor’s adjusted basis at the time of the gift as your basis. However, you need to determine if there are exceptions to the rule may apply.
In community property states (including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), each spouse is usually considered to own half of the community property.
It is a complicated matter and every case is different depending on each individual circumstances.