Almost everybody has heard about the $7500 tax credit for first-time home buyers, but what about tax breaks for home sellers? Home sellers enjoy a tremendous tax benefit upon resale. Internal Revenue Code Section 121 authorizes an “exclusion” — escape from income taxes — for profits from home sales. The exclusion is as much as $500,000 for married couples who file joint returns, and $250,000 for single filers and couples who file separate returns. What happens, though, when the gain is greater than the exclusion ceiling of $500,000 or $250,000? Answer: The excess is taxed as a long-term capital gain at a maximum rate of 15 percent, plus applicable state taxes. The key requirement: Own and live in the property as your principal residence for periods aggregating at least two out of the five years ending on the sale date, and at least two years must have elapsed since you last used the exclusion.
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