Among the largest tax breaks in the Internal Revenue Code is the $250,000 exclusion on sale of a principal residence. For married couples, the exclusion is $500,000. Either way, to qualify you must have owned the house and used it as your principal residence for at least two of the five years before the sale.
Suppose you’re married and the house you bought for $100,000 many years ago is sold for $400,000. You’d have a $300,000 capital gain, fully sheltered by the $500,000 exclusion, so you’d owe no tax.
However, home prices have increased by so much the gains may exceed the exclusion. If you sell that house for $700,000, you’d have a $600,000 gain and owe tax on $100,000, after taking the $500,000 exclusion.
Therefore, if you know that your home’s appreciation exceeds the $250,000 or $500,000 ceiling, you should take capital losses on stocks and stock funds whenever you can. Every year, $3,000 worth of net capital losses can be deducted. Any excess losses can be carried forward, building up a supply of losses that you will be able to use to offset the taxable gain when you sell your house.
