The 1997 Taxpayer Relief Act made a big difference in
the tax liability of those who sell their own homes. As it stands today,
almost no one will owe any federal tax on profit made from the sale of a
principal residence (defined by the IRS simply as the place you live
most of the time.). To qualify, you must have owned and occupied the
house as your main home for a minimum of any two of the five years
before you sell.
*It won't matter how old you are when you sell.
*It won't matter if you once used the old one-time $125,000 over-55
*It won't matter whether you buy a replacement home or not.
*It won't even matter if you've used this new exclusion on another main
home in the past, as long as it was more than two years since the last
A single owner can take up to $250,000 gain free of any federal or CA
A married couple filing jointly can take up to $500,000 in federal or
state tax. Even if only one of them owns the property, the full $500,000
is available if the non-owner spouse occupied the property for the
required two years.
The exclusion can include postponed profit on previous homes, rolled
over under the old pre-1997 rules. This new tax break can be used over
again on the sale of another principal residence, as often as every two
You can move back into income property for 2 years and then pay no taxes
on the portion you reside in (1/2 for a duplex etc.).
You can even use part of the exclusion if you were in the house less
than the full two years, if your move is required by one of three
reasons: job transfer, health reasons, or some other unforeseen
circumstance acceptable to the IRS.
So few home sales will require federal tax payments these days that in
most cases your sale won't even be reported to the IRS by the person in
charge of the closing.
If you are required to pay taxes on the sale, it probably will be
long-term capitol gains at 20% of the gain. The gain is calculated
after removing your buying and selling costs along with any improvements
you made to the property.
Sale of Principal Residence Rule Changes:
WASHINGTON, Dec. 24, 2002 - The Internal Revenue Service Monday issued
guidance in the form of both final and temporary regulations related
to excluding gain on the sale of a principal residence. Section 121
Internal Revenue Code allows exclusion up to $250,000 of the capital
gain on a principal residence for single taxpayers and $500,000 for
a married couple filing jointly. To qualify, the taxpayer must own
the home as a principal residence for any 2 of the 5 years prior
to the sale. The ownership and use periods do not need to be concurrent.
two years may consist of 24 full months or any 730 days in a 5 year
period. Treasury Decision 9030 clarifies a number of issues including
exceptions to the two-year rules for use, ownership and claimed
exclusion "safe harbors" when the primary reason for the
sale is health, change in place of
employment, or "unforeseen circumstances."
Short absences, such as for a summer vacation, count as periods of
use, but longer breaks, such as a one-year sabbatical, do not.
The taxpayer also must not have excluded gain on another home sold
during the two years before the current sale. For joint owners who
are not married, up to $250,000 of gain is tax-free for each qualifying
Employment: Exception is permitted if the new job site is at
least 50 miles farther from the old home than the old workplace was
home. This is the same distance rule that applies for the moving
Health: Exception is permitted if the primary reason is related to
a disease, illness or injury or if a physician recommends a change
residence for health reasons. In addition, a qualified person for
health reasons includes close relatives, so that sales related to
sick family members will qualify.
Unforeseen Circumstances: Exceptions occurring primarily because
of "unforeseen circumstances" include:
· Divorce or legal separation;
· Becoming eligible for unemployment compensation;
· Change in employment that leaves the taxpayer unable to pay the
mortgage or reasonable basic living expenses;
· Multiple births resulting from the same pregnancy;
· Damage to the residence resulting from a natural or man-made
· Act of war or terrorism; condemnation, seizure or other involuntary
conversions of the property.
Any of the first five situations listed above must involve the taxpayer,
spouse, co-owner, or a member of the taxpayer's household to qualify.
The Regulations also give the IRS Commissioner the discretion to
determine other circumstances as "unforeseen."
The Regulations list several factors relevant in the determination
of which home is the "principal residence" of taxpayers who own
more than one home. Among these factors include:
· Amount of time used;
· Place of employment;
· Where other family members live;
· Address used for tax returns, driver's license,
· Car and voter registration, bills and correspondence;
· Location of the taxpayer's bank, church and recreational clubs.
Taxpayers do not need to allocate the gain between the business and
residential use, if the business use occurred within the same dwelling
unit as the residential use. Capital gains taxes must be paid on
the total depreciation they took after May 6, 1997, but may exclude
additional gain on the residence, up to the maximum amount. If
the business use property was separate from the dwelling unit, they
allocate the gain and be able to exclude only the gain on the
The principal residence home sale exclusion may include capital gains
from the sale of vacant land that has been used as part of the
residence, if the land sale occurs within two years before or after
the sale of the residence.
For qualifying sellers, the maximum exclusion amount of $250K ($500K
for a married couple filing jointly) is limited to the percentage
of the 2
years that the person fulfilled the requirements. Thus, a qualifying
seller who owns and occupies a home for one year (half of 2 years)
- and who has not
excluded gain on another home in that time - may exclude half the
regular maximum amount, or up to $125K of gain ($250K for most joint
returns). The proportion may be figured in days or months.
A taxpayer who now qualifies for the reduced maximum exclusion and
has already reported a gain from the sale of a residence on a prior
tax return may use Form 1040X to file an amended return claiming
the exclusion. Taxpayers may generally amend returns til three years
original due date. The law did not require taxpayers to meet one
of the exceptions before using the reduced maximum exclusion for
homes owned on
August 5, 1997, and sold within two years after that date. Thus,
nearly all taxpayers qualifying under these regulations, should be
able to use
them by amending a recent year's return.
Treasury Decision 9030, the final home sale regulations, and the
T.D. 9031 are published in the Federal Register available at www.federalregister.gov or
go to www.irs.gov .
Every taxpayer should review their specific transaction with their
own tax and/or legal advisors. This information is not intended to
qualified tax or legal counsel.
You can also view this article on my web site at: http://SanDiegoHomes4u.com/NoTaxes.htm
For more information, see this article: http://realtytimes.com/rtnews/rtcpages/20010129_residence.htm
This is not to be taken as tax advise because I am not a CPA or tax
professional. Please consult your tax professional for complete
This valuable information is brought to you by
Dennis & Donna "Sunshine" Smith
1265 Carlsbad Village Dr. #100 Carlsbad, CA 92008
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