Tax Relief for Sellers- Selling your Home

When selling their home, most homeowners can completely avoid capital gains taxes.

What’s the current rule? What changed?

Effective from May, 1997, you are able to buy and sell a home and keep up to $500,000 tax-free ($250,000 if single) every two years, repeatedly. The old law, no longer in effect, had a one-time exclusion of up to $125,000 after you reached 55 years of age.

Selling your Personal Residence

If you owned and used your primary residence for 2 of the last 5 years, you can keep up to $250,000 of capital gains absolutely tax-free. If you’re married, the limit is $500,000. You don’t even have to file a form with the IRS — easy!

Hot Tip! Even if you lived there LESS than 2 years, there is still a way to entirely skip the capital gains tax — read the next section, "The Exceptions."

The Exceptions

What if you owned the house and lived in it, but for less than 2 years? You still might qualify to pro-rate your tax liability if you sold because of:

  1. a change in health, or
  2. a change in place of employment, or
  3. unforeseen circumstances

Let’s examine these exceptions and then take a look at how to pro-rate.

1. Change in Health

A sale will be considered as related to "a change in health" if the primary reason is related to:

(i) a disease, illness, or injury of
(ii) the taxpayer, the taxpayer’s spouse, a co-owner of the home, a member of the taxpayer’s household, or certain close relatives.

The "certain close relatives" means you can move in order to care for sick family members.
Also, if a physician recommends a change in residence for health reasons, that will suffice.

If you had a change in health, skip to "I qualify! How do I pro-rate?" below.

2. Change in Employment

A home sale will be considered as related to "a change in employment" if, during the ownership and use of the home,

(i) the taxpayer, the taxpayer’s spouse, a co-owner of the home, a member of the taxpayer’s household

moves because their new place of work is at least 50 miles farther from the old home than the old workplace was from that old home. (This is the same distance rule that applies for the moving expense deduction.)

Would you like that in English? It’s easy:

Step 1: Determine the distance (A) from your old house to your old workplace. Add 50 miles.


Old home
Distance A
Old workplace
Example:

Distance A = 15
Add 50:
15 + 50 = 65 miles

Step 2: Determine the distance (B) from your old house to your new workplace.


Old home
Distance B
New workplace
Example:

Distance B = 73 miles

Step 3: Compare: If distance B is equal to or greater than distance A, you qualify!

If you qualify due to a change in employment, skip to "I qualify! How do I pro-rate?" below.

3. Unforeseen circumstances

A sale will be considered as occurring primarily because of "unforeseen circumstances" if any of these events occur during the taxpayer’s period of use and ownership of the residence:

  • death,
  • divorce or legal separation,
  • becoming eligible for unemployment compensation,
  • a 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, or an act of war or terrorism, and
  • condemnation, seizure or other involuntary conversion of the property.

Any of the first five situations listed must involve the taxpayer, spouse, co-owner, or a member of the taxpayer’s household to qualify.

If you still don’t qualify, the IRS Commissioner has the discretion to determine other circumstances as "unforeseen."

If you had unforeseen circumstances, read "I qualify! How do I pro-rate?" below.

I qualify! How do I pro-rate?

Great! To determine how much capital gain you are allowed to exclude, pro-rate your actual occupancy over two years (the proportion may be figured in days or months).

The simple formula is:

# of days you owned & lived in house

$250,000 (or $500,000 if married)
730 days

Example: You’re single and have lived in your home for 18 months (about 540 days). You move to take a new job. You figure your capital gain to be $150,000. Is the gain taxable? Your calculation is:

540 days (your 18 months)

$250,000
(IRS limit for singles)
730 days
(IRS 2-year rule)
 = $184,931
(your prorated limit)

Since your reduced maximum limit is $184,931 and your gain is only $150,000, you pay no tax!

For more info and examples, search the IRS website for Publication 523.

How does this law help me?

You are able to buy and sell your home, tax-free, as often as every two years. (The old law had a once-in-a-lifetime exclusion of up to $125,000. The new law took effect in May, 1997)

Basic Strategy

Buy property #1 and live in it for two years. At the two-year point, rent out property #1 and buy property #2. At the four-year point, sell property #1, rent out property #2, and buy property #3. Continue this cycle of "buy-live-rent-sell" to your heart’s content!

Advanced Strategies

Contact us to discuss your goals and we’ll design a plan specific to your needs.

See also: Tax Relief for Seniors

Important disclaimer: This is general information, not tax advice. Federal and state tax laws change frequently. We are not tax or legal advisors. Please consult a qualified tax or legal professional before acting on anything described here.

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