Over-55 Home Sale Exemption Capital Gains Tax Exclusion Definition

What Was the Over-55 Home Sale Exemption?

The over-55 home sale exemption was a tax law that provided homeowners over age 55 with a one-time capital gains exclusion. Individuals who met the requirements could exclude up to $125,000 of capital gains on the sale of their personal residences.

The over-55 home sale exemption has not been in effect since 1997. This exclusion was intended to stimulate the real estate market and reward homeowners for the purchase and subsequent sale of their homes. It was replaced by other exclusions for everyone who profit from selling their principal residences regardless of age.

Understanding the Over-55 Home Sale Exemption

The over-55 home sale exemption was put into place to give homeowners some relief from the tax implications of selling their homes. The exemption no longer exists as it was replaced by new rules when the Taxpayer Relief Act of 1997 was ratified into law. This act was one of the largest tax reduction acts to be put into place by the United States government.

Under the old rule, qualifying taxpayers could avoid making tax payments on the sale of their homes provided it was a primary residence. Taxpayers who took the over-55 home sale exemption would complete Form 2119 with the Internal Revenue Service (IRS). The form was used even if the taxpayer postponed all or part of the gain to another tax year. Taxpayers were required to report losses that resulted from the sale of their home on Form 2119. However, according to the IRS, taxpayers could not deduct the loss from their tax burden.

At the time, home sellers had an alternative to the exemption. To avoid tax payments, sellers could use the proceeds from the sale for the purchase of a more expensive home within a two-year window.

Qualification of the Over-55 Exemption

When the exemption was in effect, there were several criteria for homeowners to qualify. The seller, or at least one title holder, had to be 55 or older on the day the home was sold. For married couples, just one spouse was required to meet this term. That spouse also had to be the titleholder on the date of the title transfer for the exemption to be applied. Only one exemption was allowed per married couple, which would preclude one spouse from claiming the exemption for one sale and the other spouse makes a claim for a later sale.

But there was a loophole. If a primary home was co-owned by two or more unmarried people, it was possible for more than one title holder of the appropriate age to qualify for the exemption. For the home to qualify, the titleholder had to own and use the property as a principal residence for at least three out of the five years immediately prior to selling the house. There were personal allowances for time spent away for vacations or medical care.

Special Considerations

Following the passing of the Taxpayer Relief Act of 1997, the new home sale tax burden eased for millions of residential taxpayers regardless of their age. The rollovers or once-in-a-lifetime options similar to the over-55 home sale exemption were replaced with new per-sale exclusion amounts.

Homeowners can qualify to exclude all or part of the gains received from the sale of their main residence from their income. The act raised the amount of excludable gain to $250,000 per taxpayer or $500,000 on a joint return filed by a married couple. The law also permitted more than one exclusion per taxpayer per lifetime. The taxpayer, however, can not exclude the gain from another home sale during the two-year period ending on the sale date.

Post-1997, homeowners are required to pass ownership and use tests if they wish to qualify for these exemptions. To satisfy the ownership test, taxpayers must have owned the home for at least two years. The use test, on the other hand, requires sellers to live in the home as their main residence for at least two years. Both tests must be satisfied during the five-year period up to the date of the sale. Homeowners who use their homes for business or rental income may also qualify. They must pass the homeownership and use tests also.

Example of a Home Owner's Exemption

For example, if an individual purchased a property in 2000 and lived there until 2001. The owner then rented the property for the following two years. The owner decided to move back once the tenant left and lived there until 2005. The owner then sold the property. In this case, the owner can still qualify for the exemption because the property was used as a primary residence for at least two of the five years leading up to the sale.