People who sell their home may be able to exclude the gain from their income. Here are seven things every homeowner should know if they sold, or plan to sell their house.
Amount of exclusion. When you have gain from the sale of your home, you may be able to exclude up to $250,000 of the gain from your income. For most taxpayers filing a joint return, the exclusion amount is $500,000.
Ownership test. To claim the exclusion you must have owned the home for at least two years during the five year period ending on the date of the sale.
Use test. You also must have lived in the house and used it as your main home for at least two years during the five year period ending on the date of the sale.
When not to report. If you are able to exclude all of the gain from the sale of your home, you do not need to report the sale on your federal income tax return.
Reporting taxable gain. If you have gain which cannot be excluded, it is taxable and must be reported on your tax return using Schedule D.
Deducting a loss. You cannot deduct a loss from the sale of your home.
Rules for multiple homes. If you have more than one home, you may only exclude gain from the sale of your main home and must pay tax on the gain resulting from the sale of any other home.
Your main home is generally the one you live in most of the time.
For more information see IRS Publication 523, Selling Your Home, available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).
Publication 523, Selling Your Home (PDF 194K)
Schedule D, Capital Gains and Losses (PDF 136K)
Tax Topic 701 — Sale of Your Home
Showing posts with label sale of home. Show all posts
Showing posts with label sale of home. Show all posts
Friday, March 20, 2009
Thursday, July 3, 2008
REDUCED EXCLUSION ALLOWED FOR THE SALE OF HOME
An individual purchased a residence on June 15, 2004, to be used as a principal residence for himself and his three children. He met a single mother with two children, and they were married in October of the same year. She and her two children moved into the taxpayer’s home.
The wife’s mother, for who she was caring, was left partially paralyzed because of an illness and could not live independently anymore, so the mother moved into their residence in May of 2005. In order to provide adequate space and care for his wife’s mother, the couple sold the residence in December 2005, and purchased a new home.
Code §121, provides that taxpayers can exclude the gain from the sale of residence if they own and occupy the residence tow out of the last five years. However, under special medical circumstances a reduced exclusion can be used if the sale of residence occurs prior to meeting the two-year test.
The regulations under this code provide a reduced exclusion if the sale is by reason of health of a qualified individual. A qualified individual includes the taxpayer, the taxpayer’s spouse, a co-owner of the residence, a person whose principal place of abode is in the same household as the taxpayer, and certain family members. In this PLR, the taxpayer’s disabled mother-in-law is a qualified individual for the reduced exclusion.
The IRS found that the reason for the sale of his residence prior to the two-year rule under §121(a) was to accommodate the special needs of his mother-in-law, a qualified individual. Thus, the IRS concluded that the taxpayer could exclude gain up to the reduced maximum exclusion amount under §121(c), even though he lived in the residence less than the two out of five years.
Code §121, provides that taxpayers can exclude the gain from the sale of residence if they own and occupy the residence tow out of the last five years. However, under special medical circumstances a reduced exclusion can be used if the sale of residence occurs prior to meeting the two-year test.
The regulations under this code provide a reduced exclusion if the sale is by reason of health of a qualified individual. A qualified individual includes the taxpayer, the taxpayer’s spouse, a co-owner of the residence, a person whose principal place of abode is in the same household as the taxpayer, and certain family members. In this PLR, the taxpayer’s disabled mother-in-law is a qualified individual for the reduced exclusion.
The IRS found that the reason for the sale of his residence prior to the two-year rule under §121(a) was to accommodate the special needs of his mother-in-law, a qualified individual. Thus, the IRS concluded that the taxpayer could exclude gain up to the reduced maximum exclusion amount under §121(c), even though he lived in the residence less than the two out of five years.
NEW RULES FOR SALE OF RESIDENCE WITH RENTAL USE
When a principal residence is sold, up to $250,000 ($500,000 MFJ) of the gain can be excluded from income under §121. There are special rules that aply to the sale of a principal residence when part of the residence is used to produce rental income. As of December 23, 2002, the rules changed regarding how taxpayers with rental use of their home report the sale of their residence.
GENERAL RULE
Generally, if the property is used as a principal residence in two out of five years preceding the sale, and the other §121 conditions are meet, the exclusion applies to all the gain except the part of the gain attributable to depreciation taken after May 6, 1997.
MIXED-USE PROPERTY
If property is mixed-use property (part residential and part rental), and it was not used entirely as a principal residence during the five years preceding the sale, the reporting depends on where the rental use takes place. If the rental use takes place within the dwelling unit – defined as a house, apartment, condominium, mobile hom, boat, or similar property, but does not include detached structures, all of the gain is eligible for the exclusion except the gain attributable to depreciation taken after May 6, 1997.
The fact that the principal residence is rented at the time of sale does not necessarily prevent the gain from being excluded under the code. The gain exclusion depends on whether the taxpayer meets the ownership and use requirements and the one-sale-every-two years test at the time of sale. The depreciation allowed or allowable after May 6, 1997, is not eligible for the §121 exclusion.
Additional Resources:
Monday, May 5, 2008
Tax Help - My Home and Capital Gains
Now that the real estate market is in such turmoil, there are lots of folks who have found themselves either having to sell their homes or facing foreclosure. One of the most asked questions is in regard to capital gains tax on the sell of a primary residence.
One of my clients called me last week asking about her situation and here is a snipit of my reply.
“I owned a home for 5 years. I lived in it for the first 2.5 years, then rented it out for the last two and a half. This was also my first sale. I am told many things. Some say I will pay capital gains on the years I rented it (they consider that a business); Some say you don’t have to pay capital gains because you lived in it for 3 years as your primary residence.
And my response to her was to remember two things: 2.5 years out of 5; and $250,000. You must have lived in the home for 2.5 years of the last five (at any interval); and, you are allowed to make $250,000 (single, $500,000 married) before you have to pay capital gains tax.
Now, if you had made $275,000 on the sale, then you have to pay capital gains on the $25,000 difference ($275,000 less $250,000).
Since you’ve lived in the property for 3 years out of the last five, before the sale – the house is treated as your personal residence. There is no capital gain on the sale of the house – as long as the profits are under $250,000 (or $500,000 per couple).
However, since you rented it out, you could have taken deductions for depreciation. When you sell it, you have to pay tax on the depreciation – but only up to 25%, regardless of your tax bracket.
You can read more about it, and use the timeline worksheet in IRS Publication 701.
I strongly urge anyone to have a tax professional prepare this tax return, to make sure you get this one right. It will save you a fortune in the long run.
Related articles:
Frequently Asked Questions - Keyword: Primary Residence
Sale of Residence - Real Estate Tax Tips
Sale of Your Home
Rental Income and Expenses
One of my clients called me last week asking about her situation and here is a snipit of my reply.
“I owned a home for 5 years. I lived in it for the first 2.5 years, then rented it out for the last two and a half. This was also my first sale. I am told many things. Some say I will pay capital gains on the years I rented it (they consider that a business); Some say you don’t have to pay capital gains because you lived in it for 3 years as your primary residence.
And my response to her was to remember two things: 2.5 years out of 5; and $250,000. You must have lived in the home for 2.5 years of the last five (at any interval); and, you are allowed to make $250,000 (single, $500,000 married) before you have to pay capital gains tax.
Now, if you had made $275,000 on the sale, then you have to pay capital gains on the $25,000 difference ($275,000 less $250,000).
Since you’ve lived in the property for 3 years out of the last five, before the sale – the house is treated as your personal residence. There is no capital gain on the sale of the house – as long as the profits are under $250,000 (or $500,000 per couple).
However, since you rented it out, you could have taken deductions for depreciation. When you sell it, you have to pay tax on the depreciation – but only up to 25%, regardless of your tax bracket.
You can read more about it, and use the timeline worksheet in IRS Publication 701.
I strongly urge anyone to have a tax professional prepare this tax return, to make sure you get this one right. It will save you a fortune in the long run.
Related articles:
Frequently Asked Questions - Keyword: Primary Residence
Sale of Residence - Real Estate Tax Tips
Sale of Your Home
Rental Income and Expenses
Tuesday, January 22, 2008
Tax Debt Help - Guide for Capital Gains
Capital gains are the profits earned on an investment in stocks, bonds, mutual funds, real estate, or collectibles. The following is a brief description of the types of capital gains that are reportable on your tax return.
Capital Gains Tax: Essential Tax Tips for Capital Gains & Losses A capital gain is the difference between what you paid for an investment and what you received when you sold that investment. If you made a profit on the investment, then you have a capital gain. If you lost money on the investment, then you have a capital loss. Covers record-keeping, calculating capital gains and cost basis.
Capital Gains WorksheetUse financial software or spreadsheets to track all your investment information in one place. This will save you time and frustration at tax time. Here's some tips for keeping on top of your capital gains information.
Selling Your Home: Capital Gains Tax on the Sale of a Main Home How to calculate capital gains taxes on the sale of a main home. Plus tips for lowering your capital gains using the Section 121 capital gains exclusion when selling your principal residence.
Capital Gains and Mutual Funds: Calculating Capital Gains on SharesCalculating capital gain or loss when selling shares of a mutual fund can be complicated. Essential information about capital gains distributions, calculating mutual fund cost basis, and figuring capital gains or losses.
Wash Sale Rule on Capital Losses If you buy the same stock within one month of selling that stock for a loss, your loss will be disallowed under the Wash Sale Rule. The loss is not gone forever, the disallowed is added to your cost basis in the new stock position.
Adjusted Basis DefinitionDefinition of "Adjusted Basis": the net cost of an asset after adjusting for various tax-related items.
Cost Basis Definition Definition of "Cost Basis": the original price of an asset, such as stocks, bonds, mutual funds, property, or equipment. Cost basis includes the purchase price and any associated purchase costs.
Sample Mutual Fund Cost Basis SpreadsheetSample spreadsheet for keeping track of actual cost basis in a mutual fund using the specific identification method of accounting.
S. Raines, Sr. Financial Advisor/Tax Preparer
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