|
Capital
Gains Tax Exemption on Your Primary Residence
**Please
be sure to talk with your tax professional and legal advisor
regarding real estate related taxes involved in selling your
property.
Your home is probably the most valuable asset you own. It
is also probably
your best tax shelter. Selling a home can be a major event
in the lives of its owner.
Thanks
to the Taxpayer Relief Act of 1997, selling a home does not
have to be a major tax event.
Exclusion
on the Sale of a Main Home.
According
to the Taxpayer Relief Act enacted in 1997, married couples
receive up to $500,000 in capital gains tax exclusion for
the sale of a principal residence where the owner has resided
in the property for two of the last five years. Single owners
enjoy similar $250,000 exclusion. The “two years”
in question do not need to be consecutive years. In the five
years prior to the sale of the house, you need to have lived
in the house for at least 24 months in the 5-year period.
Any profits in excess of the exclusion caps ($500,000 for
married couples; $250,000 for singles) will be taxed at the
new lower capital gains tax rate. Best of all, this principal
residence exclusion can be reused each time you sell your
main home. Keep in mind, the home must have been your principal
residence. Generally, you can claim the exclusion only once
every two years. (Some exceptions do apply)
Reporting
Gain In Excess of the Exclusion Amount on the Sale of Your
Home
The gain
in excess of the allowable exclusion is reported on Schedule
D as a capital gain. If you owned your home for one year or
less, the gain is reported as a short-term capital gain. If
you owned your home for more than one year, the gain is reported
as a long term capital gain.
Exceptions
to the 2 out of 5 Year Rule.
If you
lived in your home less than 24 months, you still may be able
to exclude a portion of the gain. Exceptions are allowed if
you sold your house because a required job change, because
of health concerns, or for some other unforeseen circumstances
that you couldn’t reasonably have anticipated before
buying and occupying your main home.
Your
CPA can help you here.
The
“Gain” from the Sale of Your Home
To calculate
the gain from the sale of your home, use the following procedure:
- Take
the selling price of the home minus the expenses from the
sale of the
home.
- From
this number, then subtract the basis of the home –
which is the price that
you originally paid for the home plus any improvements.
- The
net selling price minus the basis equals the gain on your
home!
It’s a bit more complicated than this, so don’t
try it at home! This final figure is the
realized gain from the sale of the home.
Losses
on the Sale of a Residence
Taxpayers
still cannot deduct losses on the sale of their residence.
The
Sale of More than One Home in Two Years
You can’t
exclude a gain on the sale of your home if, during the two-year
period ending
on the date of the sale, you sold another home at a gain and
excluded all or part of that
gain. If you can’t exclude the gain, you must include
it in your income.
For more information, please refer to the link for the Internal
Revenue Service
Publication 523 – http://www.irs.gov/publications/p523/index.html
Sources: Internal Revenue Service Publication 523; IRS Tax
Tip 2006-54; California
Society of CPAs; Forbes.com Financial Planning Taxes and Selling
Your home
compiled by Scott Reeves 01/17/06
|
