The Principal Residence Exclusion refers to a tax provision that allows homeowners to exclude a significant portion of capital gains from the sale of their primary home from taxable income. This exclusion is governed by the Internal Revenue Code in the United States, specifically under Section 121.
To qualify for the Principal Residence Exclusion, the homeowner must meet certain criteria. Primarily, the property must be designated as the homeowner’s principal residence for at least two out of the five years preceding the sale. This two-year requirement does not need to be continuous, meaning that homeowners can have lived in the property for different time periods within the five-year window.
The exclusion allows individuals to exclude up to $250,000 of capital gains on the sale of their home, while married couples filing jointly can exclude up to $500,000. For example, if a married couple sells their home for a profit of $600,000 after having lived there for the required time, they can exclude $500,000 from taxation, potentially only needing to pay taxes on the remaining $100,000 in gains.
Certain situations, such as changes in employment, health issues, or other unforeseen circumstances, may enable homeowners to qualify for a partial exclusion even if they do not meet the full two-year requirement. It is important for homeowners in Houston and surrounding areas in Texas to be aware of local regulations and potential additional tax implications when selling property, as state laws and municipal ordinances may also apply.
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