Over-55 Home Sale Exemption

What is 'Over-55 Home Sale Exemption'

The over-55 home sale exemption was a tax law that provided homeowners over the age of 55 with a one-time capital gains exclusion. Individuals who met the necessary requirements could exclude up to $125,000 of capital gains on the sale of their personal residences. The exclusion was intended to stimulate the real estate market and reward homeowners for their purchase and subsequent sale.

BREAKING DOWN 'Over-55 Home Sale Exemption'

Under the over-55 home sale exemption, qualifying taxpayers could avoid making tax payments on the sale of their homes. At the time, the other option home sellers had to avoid such tax payments was to use the proceeds from the sale towards the purchase of a more expensive home within a two-year window. Taxpayers who took the over-55 home sale exemption would complete Form 2119.

How the Over-55 Exemption was Applied

When the exemption was in effect, there was several criteria to qualify for it. The home seller or at least one title holder had to be 55 or older on the day the home was sold. You must be 55 or older on the day you sell your home. For married couples, just one spouse was required to meet this term. However, that spouse also had to be the titleholder on the date of the title transfer. Only one exemption was allowed per married couple, which would preclude one spouse claiming the exemption for one sale and then the other spouse also claiming an exemption for a later sale.

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. In order for the home to qualify for the exemption, the title holder had to own and live in the house as a principal residence for at least three out of the five years immediately prior to selling the house. There was allowances for time spent away for vacations or medical care.

When the Taxpayer Relief Act of 1997 was ratified into law, the home-sale tax burden eased for millions of residential taxpayers. The rollover or once-in-a-lifetime options were replaced with the current per-sale exclusion amounts. The over-55 home sale exemption was superseded by provisions in the 1997 Tax Reform Act. This act raised the amount of excludable gain to $250,000 per taxpayer, and also allowed for more than one exclusion per taxpayer per lifetime.