Dear Liz: When selling a home and qualifying for the $500,000 exemption, but only needing to use $250,000 of it, what happens to the unused balance? An accountant told my friend she would get it in cash, which sounds incorrect to me.
Answer: You’re right — that’s not correct. It’s so incorrect, in fact, that your friend is probably an unreliable narrator. It’s hard to imagine an accountant being so out of touch with this basic tax provision as to offer that advice.
Each homeowner can exempt up to $250,000 of home sale profits provided they owned and lived in the house as their primary residence for at least two of the previous five years. That means a couple can exempt up to $500,000.
There’s no cash-back offer if someone uses less than the full exemption. On the other hand, the exemption potentially could be used every two years, so it’s not exactly a “use it or lose it” proposition, either.
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