How do you get the $500,000 tax exemption on the net profit from the sale of your home?
If you and your spouse file tax return jointly, and if both meet the “use test.” That means you both lived in the house as your primary residence for at least two of the five years leading up to the date of sale (and at least one of you are on title). Here is the IRS rule:
You can exclude being taxed on $500,000 of the capital-gains from the sale of your primary residence if all of the following are true:
1. You are married and file a joint return for the year.
2. Either you or your spouse meets the ownership test.
3. Both you and your spouse meet the use test during the 2-year period ending on the date of the sale.
4. During the 2-year period ending on the date of sale, neither you nor your spouse excluded gain from the sale of another home.
Should a spouse pass away, the surviving spouse has two years from the date of death to sell the home and receive the full $500,000 exemption from capital-gains tax – as long as they haven’t remarried.