Selling Home
Taxes When You Sell
Your Home
If
you already own your home, you probably know about the generous tax break
available when you sell your home. You could have a profit of up to
$250,000, or $500,000 if you file jointly, and owe nothing on it to the
IRS. It is tax free income.
There are some rules. You must own
and use the property as your primary residence for two years out of the
five years before the sale date. You usually can not use this exclusion if
you used it for another gain within the two years before your sale date.
In other words, you must wait 24 months before you can take advantage of
this tax break again.
What if you haven't lived
there for two years?
Say you have only lived there for 18
months during the last five years. Or you may have already claimed an
exclusion within the last 24 months. Do you have to pay the taxes on the
entire gain?
The chances are that you won't have
to. You can avoid any federal tax by claiming a reduced gain exclusion. If
you don't qualify for this privilege, your entire profit will be taxed.
But don't worry, it is very easy to qualify for a reduced gain exclusion
break. If you do qualify, the exclusion is often large enough to shelter
the entire gain.
The reduced exclusion amount equals
the full $250,000 or $500,000 exception multiplied by a fraction. The
fraction is comprised of the aggregate period of time you owned and used
the home as your principal residence during the five year period or the
period between the last sale for which you claimed an exclusion and your
current sale date. This amount is divided by two years in either months or
days.
For example, you and your spouse
owned and used a home for 22 months. The reduced exclusion for your
premature home sale is $458,333 or $500,000 x (22 months/24
months).
Or you are single and have sold a
home 13 months ago and excluded the gain. Now you want to sell your
current home, which you have used for 18 months. The reduced exclusion for
prematurely selling your current home is $135,417 or $250,000 x (13/24
months).
When does this exclusion apply? It
applies when the premature sale is due to a change of employment, health
reasons or unforeseen circumstances.
Premature sale due to change
of employment
If you have a change of employment, you can now say
that this is the primary reason for your premature home sale - making you
eligible for the reduced-gain exclusion. The premature home sale is
considered if your new place of employment is at least 50 miles farther
away from your former residence than was your former place of employment.
There are exceptions to the 50-mile
test. For example, if you can show that the change was because your new
job requires you to live near your work, you could still be eligible for
the reduced gain exclusion.
Premature sale for health
reasons
The premature sale of your home is
eligible for reduced gain exclusions if your move was to obtain, provide
or facilitate the diagnosis, cure, mitigation, care or treatment of a
disease, illness or injury to a qualified individual.
This includes any member of your
home. You can also include any close relatives into the category of
qualified individual.
Premature home sales are also
automatically considered if your doctor recommends a change of residence
for health reasons.
Premature sale because of unforeseen
circumstances
You can also receive reduced gain
exclusions if your home sale was due to unforeseen circumstances, such
as:
-Death in the immediate
family
-Eligibility for unemployment compensation
-A change in
employment status or self-employment status that means you can no longer
afford your home
-Divorce or legal separation
-Seizure or condemned
status of home
-Home becomes a casualty of man-made disaster, war or
terrorism
Do you use your home for
business or rental puposes?
If you have a home office, small
business or rent out rooms in your home for the entire time you have owned
your home, you may qualify for new IRS rules that offer favorable tax
treatments. When you sell your home, you can count the home as a single
property, instead of two separate types of property. The entire home can
qualify for the $250,000 or $500,000 gain exclusions if you pass all of
the tests required. But you must pay taxes on any gain from depreciation
deductions claimed after May 6, 1997, rental or business use of your home.
You've already received the tax benefits from the earlier write offs, so
this doesn't hurt you any.
If the rental or business portion of
your property is not within you residence, you do not qualify for the gain
exclusions.
Selling vacant land near
your home
You are able to use your valuable gain exclusion to
shelter any profits from selling vacant land next to your residence. You
can sell the land around your home and your home in
separate transactions. The land must be sold with two years before or
after selling your home. The land must also be adjacent to the home and be
used as a part of the residence.
Already sold your
home?
These regulations only apply to
sales after Dec. 23, 2002. But you can use the rules retroactively for an
earlier sale, providing it occurred in a tax year that is still open. This
makes it worthwhile to file an amended return.
You usually have three years from
the original filing deadline to claim a tax refund by amending your
return.
