If you reach a point where you are ready to sell your home and “cash out” – and do something other than buying a new replacement home – the IRS has a gift for you. Under the IRS home sale exclusion, you may sell your home and pocket a gain on the sale for up to $500,000 and not have to pay income tax on the gain. That’s one of the most generous tax breaks in the entire federal income tax code.

But as generous as that exclusion is, paying a real estate commission on the sale of the property can reduce the benefit significantly.

How the Home Sale Exclusion Works

In order to qualify for the exclusion, you must live in the home as your primary residence for at least two years out of the past five years. Any gain on the sale of the property can be excluded from your taxable income for an amount up to $250,000 if you are single, or up to $500,000 if you are married filing jointly. The exclusion means that your home can generate a tax-free profit. That makes owning a home one of the most valuable investments possible.

Under normal circumstances the gain on the sale of your primary residence will not be taxable anyway – as long as you buy a replacement home of equal or greater value. That enables you to purchase a succession of homes over the course of your lifetime, without needing to concern yourself with paying taxes on the gain on the sale of each property.

However, by using the home sale exclusion, you can sell your home at a substantial profit – including cumulative profits going back to the first time you purchased a home – for up to either $250,000 or $500,000, even if you do not purchase another as a primary residence. You can only use the exclusion every two years. So if you have used it any time within the past two years, the latest sale/gain will not be eligible.

(For more information on the one-time homeowners exemption, see IRS Publication 523, Selling Your Home)

How the Real Estate Commission Cuts Into Your Exclusion

As generous as the on home sale exclusion is, it can actually be reduced if you’re paying a real estate commission, typically 6% of the total sale price. At a minimum, a $500,000 profit/exclusion will be reduced by $30,000 – if the final sale price of the home is $500,000. However, in order to attain a gain of that size, it is likely that the sale of the home will be considerably higher.

More realistically, a $500,000 gain will come from the sale of a property for say, $1 million. The real estate commission on a sale price that high will be $60,000. That will reduce the profit on sale to $440,000 ($500,000 less the $60,000 real estate commission).

But even that may be an optimistic consideration. If the gain on the sale of a $1 million home is $250,000, your gain will be reduced to just $190,000 after deducting the $60,000 real estate commission. Remember, the 6% real estate commission is assessed based on the gross sale price of the home, and not on the profit. But just the same, the real estate commission will reduce your profit, and therefore the value of the home sale exclusion.

How Eliminate the Real Estate Commission to Claim Your Full Exclusion

The obvious way to get full benefits of the entire home sale exclusion is to sell your home without paying a real estate commission. That will preserve the entire home sale exclusion for your immediate benefit.

You can do this by selling your home yourself, and that’s more doable than ever. Using my Listing Door program, you will learn how to prepare your home for sale, price the property to sell, and market it to attract qualified buyers. By selling the home yourself, the entire home sale exclusion – of either $250,000 or $500,000 – will be available for deposit into your bank account.

And if you are planning on cashing out of the housing market, perhaps to retire, you’ll need the full benefit of the entire home sale exclusion. My program will help you to do just that.

( Photo by pictures of money )