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Donna "Sunshine" Smith

We Make Home Buying
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Office: 760-436-0087 
Cell/Text: 760-212-8225

Taxes on the
Gain on Your Home?


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 exclusion.
*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 sale.

A single owner can take up to $250,000 gain free of any federal or CA tax.

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 years.

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 of the 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 and use 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. The 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 owner.

Employment:  Exception is permitted if the new job site is at least 50 miles farther from the old home than the old workplace was from that home. This is the same distance rule that applies for the moving expense deduction.

Health: Exception is permitted if the primary reason is related to a disease, illness or injury or if a physician recommends a change in residence for health reasons. In addition, a qualified person for health reasons includes close relatives, so that sales related to caring for 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 disaster;
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 would allocate the gain and be able to exclude only the gain on the residential unit.

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 year's tax return may use Form 1040X to file an amended return claiming the exclusion. Taxpayers may generally amend returns til three years from the
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 or go to .

Every taxpayer should review their specific transaction with their own tax and/or legal advisors. This information is not intended to replace qualified tax or legal counsel.

You can also view this article on my web site at:

For more information, see this article:

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 details.

This valuable information is brought to you by

Dennis & Donna "Sunshine" Smith
1265 Carlsbad Village Dr. #100 Carlsbad, CA 92008
Office: 760-436-0087
Fax: 760-436-0996
Cell/Text: 760-212-8225

Please feel free to use us as your Real Estate Resource.

Oh, by the way, if you know of, or talk to, a friend or relative who is considering buying or selling Real Estate, please let us know so we can offer them the same valuable service we give to you.

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