Home sales provide most owners a major tax break

Are you seeing the same thing this summer in your neighborhood that I am in mine? 

I'm talking about "for sale" signs. Even better, most of them have "sold" (or "gone") placards attached to them.

The Mortgage Bankers Association's mortgage applications survey for the week ending July 4 found that the number of home loan applications was up almost 2 percent from the previous week.

Couple that with the most recent existing-home sales survey done by the National Association of Realtors, which found gains in all regions of the country in May compared to a month earlier, and it's good news for folks looking to sell.

All that, however, is not necessarily good news for the U.S. Treasury.

Home sale = major tax break: Back many, many years ago when I was a new homeowner, I freaked out a bit when I saw neighbors wanting to leave.

"What's wrong with our neighborhood?" I would wonder.

Now, as someone who's owned five residences and sold four of them, I've come to realize that people aren't necessarily bailing out of a place.

A lot of the time, they're taking advantage of the market to pocket the tax-free cash that comes from the sale of a residence.

This week's Weekly Tax Tip looks at the Internal Revenue Service rules when it comes to avoiding capital gains on a home sale.

The quick down and dirty is that as long as the house you own (along with, for most of us, the bank that holds the mortgage) and live in the house for two of the five years before you sell, a large chunk of your sale profit will be free from tax.

Timing the sale: Here's a fun quirk of the ownership/primary residence rule. To qualify for the home sale exclusion, you don't have to be living in the house when you sell.

The tax-break-required two years of ownership and use can be anytime during the five years before the date of the sale.

Say you live in your home for two years, then move to take a job elsewhere. But sale prices are low in your neighborhood, so instead of selling you decide to rent your former home. When the market picks up, as long as it's within the five-year own/occupy window, you still qualify for the sale exclusion.

And it's definitely worth making sure you pay attention to the calendar.

The home-sale tax exclusion amount is $250,000 for single homeowners/sellers and $500,000 for married couples.

You also might find these items of interest:

• Home prices, construction outlook up. So are property tax bills
• Home improvements that can pay off on your taxes when you sell
• Home-related tax breaks among 13 specific deductions listed on Schedule A