Excluding Gain from a Home Sale
Homeowners may exclude as much as $250,000/$500,000 (single/married filing jointly) of gain from the sale of their principal residence, and they may do so as frequently as every two years. The exclusion is a significant tax benefit for taxpayers who qualify to take advantage of it.
Single taxpayers may qualify to exclude gain of up to $250,000 if they owned and used the home as their principal residence [or at least two of the five years before the sale. Similarly, married couples who file jointly may exclude up to $500,000 of gain, provided that at least one of the spouses owned the home for two of the previous five years and both spouses used it as a principal residence for two of the previous five years.
A single taxpayer generally may use the exclusion for a sale only every two years. A married couple may use it only if neither individual used the exclusion within the two-year period prior to the sale date.
A surviving spouse may qualify for the $500,000 exclusion if (1) the sale occurs not later than two years after the other spouse's death, (2) the requirements for the $500,000 exdusioll were met irrunediately before the spouse's death, and (3) the surviving spouse hasn't remarried as of the date of the sale.
Reduced exclusions are allowed if the taxpayer is unable to meet the full twoyear ownership and use requirements or has already used the exclusion for a sale of a principal residence in the previous two years, provided the primary reason for the premature sale was a change in place of employment, a health condition, or "unforeseen circumstances."
The IRS has provided "safe harbor" guidance for these exceptions:
Work related - The sale occurred during the period the seller used the property as his principal residence and the new place of employment is at least 50 miles farther from the home than the old place of employment.
Physician's recommendation - A doctor recommended a change of residence for reasons of diagnosis, treatment, etc., for a medical condition of a qualified person.
Unforeseen circumstances - A qualifying event'. (e.g., natural disastpr, neath of a qualified person) occurs that could not reasonably have been anticipated before the home was purchased and occupied.
The reduced exclusion is calculated by dividing the period of qualifying use by the required two-year period. For example, a single person with one year of qualifipd lise and ownership could claim half of the applicable $250,000 exclusion.
Certain situations can complicate the application of the general rule. These include:
- Transfer of property from a spouse (e.g., as part of a divorce settlement)
- Inheritance of property from a spouse
- Use of property as other than a principal residence after 2008
- Prior claims for depreciation deductions on the property.
Additionally, if you anticipate selling your home for a price that exceeds the exclusion, you will need to properly calculate your basis in the residence. Your taxable gain will generally equal the excess of your net sale proceeds over the sum of your basis and the applicable exclusion. Basis includes acquisition costs, certain improvements, and special assessments for local improvements.
Please contact us if we can help you use this valuable tax break to exclude gain from a home sale.
15 Individuals: Th ird installment of 2016 estimated tax due; file Form 1040-ES.
15 Corporations: Last day for filing 2015 income tax return (Form 1120, 1120S) by a calendar-year corporation that obtained an automatic six-month filing extension.
15 Corporations: Due date for depositing the third installment of estimated income tax for 2016 for calendar-year corporations.
15 Partnerships: Last day for filing 2015 return (Form 1065) by a calendar-year partnership that obtained a five -month filing extens ion.
17 Individuals: File 2015 federal income tax return and pay any tax due if you obtained a six-month fil ing extension.
31 Employers: File Form 941, Employer's Quarterly Federal Tax Return, for the third quarter of 2016.
10 Employers: Deferred due date for Form 941 , ifti mely deposits were made.
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