Exclusion of Gain
Principal residence defined
A principal residence is your main home, which is the home where you ordinarily live most of the time. You can have only one main home at any one time.
Individual homeowners
Individuals can exclude up to $250,000 of gain on the sale of a home if three tests are satisfied.
1. Ownership
You owned the home for at least two years during the 5-year period ending on the date of sale.
2. Use
You used the home as a principal residence for at least two years during the 5-year period ending on the date of sal.
3. Two-year period
You did not exclude gain from the sale of another home during the 2-year period ending on the date of sale
If you are a co-owner, you must calculate gain or loss ac-cording to your ownership interest in the home and then apply the exclusion rules on an individual basis.
Married homeowners
Married couples can exclude up to $500,000 of gain on the sale of a home if:
1. Joint return
You, as a couple, file a joint return for the year
2. Ownership
Either you or your spouse meets the owner-ship test, above,
3. Use
Both of you meet the use test, above
4. Two-year period.
Both of you meet the 2-year period test, above.
Ownership and Use Rules
The required two years of ownership and use during the 5-year period prior to the sale do not have to be continuous. The ownership test and the use test can be met at different times during the 5-year period. Short, temporary absences for vacations or other seasonal absences are counted as pe-riods of use (even if the property is rented out during the absence).
Surviving spouse
A surviving spouse who does not re-marry before the sale of a home is considered to have owned and used the home as a primary residence during the deceased spouse’s ownership and use period.
The $500,000 exclusion applies to an unmarried surviving spouse provided the sale occurs not later than two years af-ter the date of death of the deceased spouse, and the couple would have qualified for the $500,000 exclusion if the sale had occurred immediately before the date of death.
Home transferred from spouse
If you acquire a home in a transfer from your spouse (or former spouse if the transfer was incident to divorce) you are considered to have owned the home during any period of time your spouse (or former spouse) owned it.
Divorced individuals
You are considered to have used a home as a principal residence during any period when (1) you owned the home, and (2) your spouse or former spouse is allowed to live in it under a divorce or separation instru-ment and uses the home as a principal residence.
Inherited home
If you inherit a home you are generally not eligible for gain exclusion unless you meet the ownership and use tests for the inherited home.
Sale of Vacant Land Adjacent to Residence
The sale of vacant land is not treated as a sale of your prin-cipal residence unless:
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The vacant land is adjacent to your principal residence,
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You owned and used the vacant land as part of your prin-cipal residence,
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The sale of the principal residence satisfies the require-ments for exclusion and occurs within two years before or after the sale of the vacant land, and
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The ownership and use requirements for the vacant land have been satisfied.
If these requirements are met, the sale of the principal resi-dence and the vacant land are treated as one sale. Only one maximum limitation amount of $250,000 ($500,000 for eligi-ble MFJ) applies to the combined sales.
Partial Maximum Exclusion of Gain
If you do not meet the 2-year ownership and use tests, or you have already excluded gain from the sale of another home during the 2-year period prior to the sale of a cur-rent home, you may claim a partial exclusion on the sale of a home if the primary reason for the sale is due to:
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A change in place of employment of a qualified individual,
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The health of a qualified individual, or
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Unforeseeable events.
Qualified individual
For purposes of the partial exclu-sion, a qualified individual is you, your spouse, a co-owner of the home, or a person whose primary residence is the same as yours.
1. Change in place of employment
Employment in-cludes the start of work with a new employer, continuation of work with the same employer, and the start or continua-tion of self-employment.
Distance safe harbor
A change in place of employment is considered to be the reason you sold a home if:
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The change occurred during the period the property was used as a principal residence, and
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The new place of employment is at least 50 miles farther from your home than the former place of employment was. If there was no former place of employment, the new place of employment must be at least 50 miles from the home that was sold.
2. Health
You can claim a partial exclusion if the primary reason for the sale is:
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To obtain, provide, or facilitate the diagnosis, cure, miti-gation, or treatment of disease, illness, or injury for your-self or a family member, or
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To obtain or provide medical or personal care for yourself or a family member. The sale of a home is not because of health if the sale merely benefits a qualified individual’s general health or well-being.
3. Unforeseeable events
The partial exclusion rules do not apply if the primary reason for the sale was a prefer-ence for a different home or an improvement in household finances.
Specific event safe harbors
Specific event safe harbors in-clude the following.
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An involuntary conversion of the home.
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Natural or man-made disasters or acts of war or terror-ism resulting in a casualty to the home.
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Events that apply to you or a family member include death, unemployment (if you or a family member is el-igible for unemployment compensation), a change in employment or self-employment status that results in an inability to pay reasonable basic living expenses, divorce or legal separation, or multiple births resulting from the same pregnancy.
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Any event the IRS determined to be unforeseen.
Facts and circumstances
If you do not meet the specif-
ic event safe harbor rules you may still be able to claim a
partial exclusion.
Contact Us
There are many events that occur during the year that can affect your tax situation. Preparation of your tax return involves sum-marizing transactions and events that occurred during the prior year. In most situations, treatment is firmly established at the time the transaction occurs. However, negative tax effects can be avoided by proper planning. Please contact us in advance if you have questions about the tax effects of a transaction or event, including the following:
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Pension or IRA distributions.
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Significant change in income or deductions.
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Job change.
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Marriage.
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Attainment of age 59½ or 73.
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Sale or purchase of a business.
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Sale or purchase of a residence or other real estate.
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Retirement.
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Notice from IRS or other revenue department.
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Divorce or separation.
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Self-employment.
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Charitable contributions of property in excess of $5,000.
*This post contains general information for taxpayers and should not be relied upon as the only source of authority. Taxpayers should seek professional tax advice for more information.